Download - Taxation Philippines: Leasehold Improvements
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INCOME onINCOME on
Leasehold ImprovementsLeasehold Improvements
ANGELITO C. DESCALZO, CPAANGELITO C. DESCALZO, CPA
ICAEW IFRS CertifiedICAEW IFRS Certified
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Leasehold ImprovementsLeasehold Improvements -- DefinitionDefinition
Alterations made to rental premises in order to
customize it for the specific needs of a tenant.
Leasehold improvements include construction ofbuilding, fencing, painting, installing partitions,
changing the flooring, putting in customized light
fixtures, etc.
Leasehold improvements can either be undertaken bylandlords (lessors), who may offer to do so to increase
the marketability of their rental units, or by the tenants
(lessees) themselves.
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When the lessee makes useful improvement to the leased
property, the following rules shall apply if no reimbursements
are made by the lessor:
1. The lessor may report income under the:
a. Outright method based on fair marketva ue o mprovemen s n e year o
completion
b. Spread-out method book value (BV) of
improvements are spread over the remaining
term of the lease
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Rules on Leasehold Improvement (continued):
2. Lessee may claim depreciation of the
improvements over the remaining term of the lease
or life of the improvements, whichever is shorter.. ,
lessor should report income based on the BV upon
termination less amount already reported as
income.4. The lessor shall apply cash method on
prepayment of rental even if it is using accrual
accounting.
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Leasehold ImprovementsLeasehold Improvements
Note:
If leased property (land and building) is being used
actually, directly and exclusive foreducationalpurpose, t e essee s a e exempt rom pay ng rea
estate tax.
All assessments or reassessments made after the 1st
day of January of any year shall take effect on the 1stday of January of the succeeding year(Sec. 221, Local
Government Code of 1991).
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IllustrationIllustration Leasehold ImprovementLeasehold Improvement
Mr. A leased a land to Mr. B for a period of 20 years starting
January 2, 2012 at a monthly rental of P50,000.
The Lease contract provides that Mr. B will construct a school
house on the lot.
The contract also provides that the improvement shall become
property of the lessor at the end of the lease.
The school house was completed on June 30, 2014 at a cost of
2,000,000.
The estimated life of the leasehold improvement is 25 years. Mr. B agreed to pay the real estate tax on the land assessed at
P34,567 annually.
Mr. B paid Mr. A an equivalent of 2 years rent on January 3,
2012.
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Q1Q1 What is the income to be reported byWhat is the income to be reported by
the lessor in 2012?the lessor in 2012?
Cash received (P50,000 x 24) 1,200,000
Tax aid b lessee 34 567
Income to be reported in 2012 1,234,567
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Q2Q2 What is the income to be reported byWhat is the income to be reported by
the lessor in 2013?the lessor in 2013?
Tax paid by lessee 34,567
Income to be re orted in 2013 34 567
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Q3Q3 What is the income to be reported byWhat is the income to be reported by
the lessor in 2014 under the outrightthe lessor in 2014 under the outright
method?method?
Rent income (50,000 x 12) 600,000
Leasehold improvement 2,000,000
Tax paid by lessee 34,567
Income to be reported in 2014
under outright method 2,634,567
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Q4Q4 What is the income to be reported byWhat is the income to be reported by
the lessor in 2014 under the spreadthe lessor in 2014 under the spread--outout
method?method?
Rent income (P50,000 x 12) 600,000
Tax paid by lessee 34,567
Cost 2,000,000
Less: Accumulated amortization
(2,000,000/25 x 17.5) 1,400,000
Book value, end of lease 600,000
Computation: (600,000/17.5) x 6/12 17,143
Income to be reported in 2014
under spread-out method 651,710
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Q5Q5 What is the income to be reported byWhat is the income to be reported by
the lessor in 2015 under the spreadthe lessor in 2015 under the spread--outout
method?method?
Rent income (P50,000 x 12) 600,000
Income on Leasehold improvement: , ,
Less: Accumulated amortization
(2,000,000/25 x 17.5) 1,400,000
Book value, end of lease 600,000
Computation: (600,000/17.5) 34,286
Income to be reported in 2015
under spread-out method 634,286
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Q6Q6 Assuming the lease contract was terminated onAssuming the lease contract was terminated onMarch 31, 2018 due to lessees fault, how much incomeMarch 31, 2018 due to lessees fault, how much income
should Mr. A report in 2018 under the spreadshould Mr. A report in 2018 under the spread--out method?out method?
Cash received (50,000 x 3) 150,000
Leasehold improvement:
Cost 2,000,000ess: ccumu a e eprec a on
(2,000,000/25 x 3.75) 300,000
Book value upon termination 1,700,000
Less:Amount declared as income
2014 17,143
2015 34,286
2016 34,286
2017 34,286 120,001 1,579,999
Income to be reported in 2018 1,729,999
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Q7Q7 How much deductible expenses canHow much deductible expenses can
the lessee report in 2014?the lessee report in 2014?
Rent expense (P50,000 x 12)
Tax
600,000
34,567
De reciation on LHI
2,000,000/17.5 x 6/12 57,143
Expenses to be reported in 2014 691,710
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Q8Q8 How much deductible expenses canHow much deductible expenses can
the lessee report in 2015?the lessee report in 2015?
Rent expense (P50,000 x 12) 600,000
Depreciation on LHI, , . ,
Expenses to be reported in 2015 714,286
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Q9Q9 How much deductible expenses canHow much deductible expenses can
the lessee report in 2018?the lessee report in 2018?
Rent expense (P50,000 x 3) 150,000
Depreciation on LHI, , . ,
Expenses to be reported in 2018 178,571
Note: Remaining book value of leasehold improvementshall be treated as other loss by the lessee
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GROSS INCOME fromManufacturing, Merchandising or
Mining business
Computation ofGross income:
Total sales Pxxx
Less: Cost of Goods Sold xx
Gross Profit Pxxx
Add: Other Income xx
Gross Income Pxxx
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GROSS INCOME from Farming
Farm includes livestock, dairy, poultry, fruit and truckfarms, plantations, ranches, and all land used for
farming operations.Methods of reporting gross income:
a. Cash basis no inventory is used to determineprofits
b. Accrual basis an inventory account is used todetermine profits
c. Crop basis used when crops take more a yearto gather and dispose of from the time of planting.