INCOME TAX KNOW-HOW FOR NON-ACCOUNTANTS
The yearly income tax deadline is fast approaching and you must remember that leaving everything to your accountant does not exempt you from criminal and civil liabilities. Ignorance of the law is no excuse, so before signing your income tax forms, it is your responsibility to understand if it is correctly done so that you will not be charged with violations.
The Bureau of Internal Revenue (BIR) is now very aggressive in trying to reach its revenue targets so you must have a basic understanding of the correct way of paying your income tax in case you are selected for auditing. Unlike popular misconception, you do not need to be an accounting graduate to learn many important matters regarding income taxation. Just the same, knowing the basics about taxation is very helpful. Here are a few of the important things you must learn:
The types of income tax. There are many types of income tax. It is important to know these because of the differences in tax rates. They are also paid at different points in time. You must know what types of income taxes you must pay and when you should pay them.
Individual and corporate income tax. There are many differences in the way income taxes are computed between individuals and corporations. It is crucial that you know the fundamental regulation governing the type of tax. Note that it is possible to pay tax twice on the same income since the corporation is treated as a different entity.
Deductions on income tax. This is where a lot of problems arise. The BIR is very strict in allowing deductions. Having sufficient documentation of expenses is critical. Know when to ask for an official receipt and when to ask for an invoice. The correctness and completeness of filling up of the documentation is important so that it would not become void. There are also limits to certain types of expenses.
Optional standard deduction. This may be the best option for many service-oriented businesses or professions who have few purchases. Choosing optional standard deduction (if applicable) means you can assume that your expenses are just 40 percent of your gross sales or gross receipts if you are an individual, or 40 percent of your gross income, if you are a corporation. You should compute to see if this is more advantageous for your situation instead of itemizing your expenses which can be very tedious.
Representation expense. Even if the expense is part of and necessary to the business, the BIR does not allow deductions for representation expense beyond a certain percentage. The amount of this percentage depends on the nature of your business.
Your income tax is too important a matter to be left solely at the discretion of your Accountant. Since it is you who would be most harmed in case of problems, it is best for you to know as much as you can about the subject.
Source: BusinessCoach PH
Very informative & helpful. Thanks!
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Edgar Navarro Picache, CPA is a financial executive with 20+ years of practical experience in a variety of leadership positions in public accounting and private industry.
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