Common Errors on BIR Tax Returns and Financial Statements

  • Post author:
  • Post category:Tax

The tax return system can be hard to understand, especially for those who are unfamiliar with the finer points of the mandates of the law. On top of that, it can be confusing to keep updated with the frequently changing revenue regulations. When filing your taxes, it is important to take note of everything that needs to be done to avoid mistakes. 

According to tax services in Manila, failure to file the correct returns and financial statements equate to significant and unnecessary financial losses. To help you file correctly, check out this compilation of the most common mistakes people make when filing taxes and prepping financial statements. Continue reading to learn more about them and how to avoid them so you can prepare the correct returns and maximize your deductibles. 

1. 10% IAET applies to excess retained earnings.

The glaring fee retained earnings greater than paid-up capitalization on audited financial statements is an indication of improper accumulation of earnings after tax, which is subject to a 10% penalty. With proper tax preparation, this 10% tax could be avoided. If you find yourself in a situation like this, talk to your tax professional about what you can do about it. After consulting with tax and audit services in the Philippines, you may realize that there may be a few options available to you.

2. Improper use of Philippine creditable withholding tax credits.

Taxes paid for by your supplies, as shown by BIR Form No. 2307, can be deducted from your taxable income as tax credits or deductions. The amount of such a material asset that should have been used would sometimes be shown in the financial statements. However, there are instances in which such assets reflected in the financial statements do not have the appropriate BIR Form 2307 documentation, or, if there is such documentation, it relates to prior years. Don’t make this mistake that can result in penalties. Make sure you prepare all the correct forms during tax filing season to avoid further stress. 

3. Claim of deductions for expenses without tax withholding.

If an expense is subject to withholding tax under the amended tax code, section 34(k), the expense cannot be deducted until the appropriate withholding taxes have been paid. Double-checking payees and employees who have been properly filed with the BIR and ensuring that justifications are available for expenses for which taxes have not been withheld are two ways to ensure that only properly withheld expenses are deducted.

4. Disregard for the NOLCO tax deduction.

Another tax asset that some people simply overlook is the net operating loss carry-over (NOLCO). For taxpayers claiming itemized deductions, the NOLCO deduction must have been correctly stated on the income tax returns and financial statements for the preceding year. Tax payers are eligible to claim this within 3 taxable years from the year of loss using a first-in and first-out basis. 

5. Disregard for MCIT credits

Another tax credit that some people would overlook is the minimum corporate income tax (MCIT) of a previous year or years. Check that the MCIT is listed on the audited financial statements and annual income tax return during the year of MCIT payment. According to accounting services in the Philippines, MCIT credits can be claimed within 3 taxable years just like the NOLCO. This commences from the year a company became liable to the standard corporate income tax of 30%.

6. Taxing non-taxable income.

Other Income is a one-line item, as shown in the financial income and books of accounts. Do not erroneously conclude that the same is automatically exempt from the 2% MCIT calculation or subject to the 30% corporate income tax. 

7. Financial statement notes that did not meet BIR requirements.

The SEC Philippines’ rules and regulations do not only mandate the addition of notes to financial statements. Additionally, BIR has mandated that certain tax-related items and information be included in the financial statements.

8. Failure to account for accrual tax withholding.

In order to fully comply with tax regulations regarding the tax deductibility of expenses, make sure that you properly account for taxes when making expense accruals.

9. Failure to account for year-end DST on debt agreements.

Ensure that the documentary stamp tax (DST) on debt instruments imposed by Section 179 of the amended Tax Code is properly accounted for.

While all taxpayers want to file their taxes before the deadline, not everyone succeeds due to various reasons like missing paperwork or improper accounting records. As a result, you’re working with erroneous data that may result in incorrect computations. Avoid making mistakes that could lead to a tax investigation by calling our CPA firm for assistance. We’d love to help you iron things out and avoid costly mistakes right from the start.