SUMMARY OF TAXING INCOME FOR ESTATES AND TRUSTS

  1. What is an “estate” and when is it considered as a separate income taxpayer? An “estate” is the totality of the property left by a deceased person, whether real, personal, tangible or intangible. An

“estate” is considered as a separate income taxpayer only when it is a subject either of an “intestate court proceedings” or a “testate court proceedings”.

2. What is a “trust” and when is it considered a separate income taxpayer? A “trust” is the totality of property conveyed by a person called the trustor to another person called the trustee for the purpose of enabling the latter to safeguard such property. A “trust” is considered as a separate income taxpayer if the “trust” created is an irrevocable trust.

  1. Rules in the computation of the tax on estates and trusts:

a. The same rules in the determination of gross income for individuals are applied in the case of estates and trusts.

b. Estates and trusts are allowed the same deductions from gross income as are allowed to individuals. In addition, they can further deduct the following items from gross income:

1. Amount of its income which is to be distributed currently to the beneficiaries; and

2. Amount of its income for the taxable year which is properly paid or credited during such year to any heir, legatee, or beneficiary, but the amount so allowed as a deduction shall be included in computing the taxable income of the heir, legatee or beneficiary.

c. Estates and trusts are required to use only the calendar accounting period.

d. Estates and trusts are allowed an exemption of P20,000.

e.The progressive rates of tax used for individuals are applied to estates and trusts.

4. Consolidation of income in trusts. This is done when the grantor and the beneficiary of the several trusts are the same person in each instance.

 

Tax formula:          
Consolidated gross income       P xxx
Less: Consolidated deductions         xxx
Consolidated net income         xxx
Less: Exemption of a single amount of         20,000
Taxable income of several trusts       P xxx

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SUMMARY OF TAXING INCOME FOR PARTNERSHIPS (PH) AND PARTNERS

Taxable PH Tax exempt PH
    GPPH/JV or Consortium for CP/EO
All other PH  
    Extension of the partners
Corporation  
Calendar/Fiscal accounting period Calendar accounting period only for GPPH
QF/P – within 60 days ff. close of 1,2 & 3 quarters AIIR – on or before the 15th day of the 4th
    month ff.
AF/AITR – on or before the 15th day of the 4th month ff. the close of C/F AP
the close of C/F AP NI (NL) computed in the same manner as a
    corporation
Partners   Partners
  Income constructively received in cash  
  Irrespective of AM used, share in NI taxable to the  partners, distributed or not
  Share in NL is deductible in tax exempt PH only, but not in taxable PH
Final tax rate: Annual ITR
1998 – 6% Compartment: Pr for GPPH (treated as GI)
1999 – 8% Deductions: Itemized/40% OSD based on GS or
    GR
2000 – 10% Progressive rates
  Compensation paid to partners  
Compensation: Additional professional income for GPPH:
AITR – Co AITR – Pr
Progressive rates Progressive rates

 

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JONATHAN RUIZ CPA, MIB

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CO-OWNERSHIP

  • Is a co-ownership taxable? Generally no, because the activities of the co-owners are usually limited to the preservation of the property owned in common and collection of the income therefrom.

 

  • What is the tax liability of the co-owners? They shall report in their respective income tax returns their shares of the income of the co-ownership.

 

  • When will a co-ownership be taxable? When the income of the co-ownership is invested by the co-owners in business or other income producing properties, the co-ownership will be taxable as a corporation because the co-owners have constituted themselves into a taxable PH.

Questions to ponder:

1. For purposes of income taxation, which of the following is not considered as corporation?
  a. General professional partnership c. Unregistered partnership
  b. Business partnership d. Joint stock companies  

2. A general professional partnership is exempt from income tax, but is required to file an annual income information return:

A. For statistical purposes.

B. Because the net income of the partnership will be traced into the income tax return of the partners.

C. Because all income earners are required to file income tax returns.

D. None of the above.

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Surtax /IAET

Surtax  
Penalty tax 10% of the improperly
Improperly accumulated accumulated profits
profits tax every TY (CY/FY)
Additional tax to the R/NCIT

Effectivity: Starting January 1, 1998 accumulated profits

Corp. Covered: Every domestic corporation formed or availed for the purpose of avoiding the imposition of income tax to its stockholders or stockholders of other corporation by permitting its profits to accumulate instead of being distributed.

Presumption or evidence of avoiding the payment of income tax to stockholders:

  • is a mere holding Co.
  • is an investment Co.
  • Profits of the corp. are permitted to accumulate beyond the reasonable needs of the business.
  • Closely-held corp. (family corp.)

Circumstances indicative of improper accumulation of profits:

  1. Withdrawals by stockholders disguised as loans.
  2. Expenditures by the corp. for the personal benefit of the stockholders.
  3. Yearly substantial advances made to stockholders-officers.
  4. Investments in unrelated business.
  5. Radical change of business when large profits have been accumulated.

Circumstances considered proper accumulation of profits:

  • Additional working capital purposes.
  • Purchase of long-life assets reasonably required by the business.
  • Obligation in a contract to set aside funds in a sinking fund to settle debt.

Improperly accumulated taxable profits:

  1. After tax net income
  2. Net operating loss carry-over deducted
  3. Income subject to final tax (net)
  4. Income exempt from income tax
  5. Income excluded from gross income
  6. Reduced by dividends actually or constructively paid

Exempt corporations: (I-PNB)

  • Insurance companies
  • Publicly-held corporations
  • Non-bank financial intermediaries
  • Banks

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QUARTERLY CORPORATE RETURNS

Who are required to file?

Every corporation or partnership subject to income tax shall file a quarterly summary declaration of its gross income and deductions on a cumulative basis.

Time of filing and payment

The return shall be filed and the tax paid within 60 days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal.

Time of filing final or adjustment return

A final or adjustment return shall be filed on or before the 15th day of the 4th month following the close of the calendar or fiscal taxable year.

Final payment of income tax

The amount of income tax to be paid shall be the balance of the tax on the final return after deducting therefrom the quarterly income taxes paid during the preceding first three quarters of the same calendar or fiscal taxable year.

Note: If quarterly payments exceed the tax on the final return, the excess shall either be (1) Refunded or (2) Credited against the estimated quarterly income tax liabilities for the quarter of the succeeding taxable year.

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MCIT AND GROSS INCOME

Meaning of gross income:1.

  1. For sale of goods – Gross sales less sales returns, allowances, discounts and cost of goods sold.
  2. For sale of services – Gross receipts less sales returns, allowances, discounts and cost of services sold. Cost of services sold means all direct costs and expenses incurred to provide the services required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (b) cost of facilities used directly in providing the service such as depreciation, rental of property and cost of supplies. In the case of banks, cost of services sold shall include interest expense.
  3. It shall also include all items of income enumerated under Section 32 (A) of the Tax Code, except income exempt from tax and income subject to final withholding tax.

Corporations covered:

Domestic          Those whose taxable income are subject to the            regular                                or           normal    tax rates  of 32%, 35%,

Resident FC   30%. Not those enjoying preferential rates on their taxable income.

When?

Effective, 1/1/98. (regular or normal rates then were: 1998, 34% and 1999, 33%) Provided it is already the 4th TY or beyond after commencement of its operations. Registration date with the BIR is the start of commencement of operations.Prorate TI for CY 2005 and if FY ended 11/30/05 or during 2009.

 

Amount payable:

MCIT when: There is 0 taxable income or net loss In excess of the R/NCIT

When payable: Quarterly and annual bases. Simultaneous: (a) to filing the quarterly ITR (within 60 days from the close of each of the first 3 quarters of the taxable year); and (b) to filing the annual Final or Adjustment ITR (on or before the 15th day of the 4th month following the close of the taxable year).

Excess MCIT over R/NCIT paid: Creditable against the R/NCIT of the immediate following 3 years provided the R/NCIT is greater than the MCIT. The excess MCIT losses its creditability after 3 years.

Suspension of imposition (exception)

Proven substantial losses due to:

  1. Prolonged labor dispute (over 6 months)
  2. Force majeure (act of GOD or insurgency)
  3. Legitimate business reverses (fire or theft)

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TRADE, BUSINESS, PRACTICE OF PROFESSION AND OTHER INCOME (AITR)

Computation of tax base for trade, business, profession and other income combined.  
Gross income   Pxxx
Less itemized deductions or 40% optional standard    
deduction (OSD) based on GS or GR   xxx
Net income   xxx
Les s:    
Personal and additional exemptions Pxxx  
Health and/or hospitalization insurance xxx xxx
Taxable income   Pxxx

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