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ReSA

The Review School of Accountancy


Tel. No. 735-9807 & 734-3989

TAXATION TAMAYO/GARCIA
TX 1001: Income Tax (Capital Assets and Capital Gains and Losses)
1. Capital Assets
a. Meaning of capital assets The term capital assets means property held by the taxpayer whether or not
connected with his trade or business.
b. Not included in capital The term does not include the following (hence ordinary assets):
assets a. Stock in trade;
b. Property of a kind which would be included in inventory of the taxpayer if on hand at
the close of the taxable year;
c. Property held by the taxpayer primarily for sale to customers in the ordinary course
of trade or business;
d. Personal property used in the trade or business which is subject to allowance for
depreciation;
e. Real property used in business.
c. Exercise: Classify the following into capital asset or ordinary asset
Classification Reason
1. Accounts receivable
2. Securities held as investment
3. Interest of a partner in a partnership
4. Apartment house
5. Inventories of raw materials, work in process and finished goods
6. Office equipment
7. Land used in business
8. Land for sale by a real estate dealer
9. Residential house and lot
10. Car for personal use
*

2. Terms Associated with Capital Assets


a. Net capital gain The excess of capital gain over capital loss.
b. Net capital loss The excess of capital loss over capital gain.
c. Holding period The length of time the asset was held by the taxpayer. It covers the period from the
date of acquisition to the date of sale.

3. Summary of Important Points


Taxpayers other than corporations Corporations
a. Short term capital gain or
loss (capital asset has
100% 100%
been held for not more
than 12 months)
b. Long term capital gain or
loss(capital asset has
50% 100%
been held for more than
12 months)
c. Limitation on deduction Capital losses shall be allowed only to the Capital losses shall be allowed only to the
of capital losses extent of capital gains. extent of capital gains.
d. Net capital loss carry over Net capital loss is carried over to the Capital loss carry over is not allowed.
succeeding year as a short term loss (100%).
Amount to be carried over is the lower
between the net capital loss and net income
in the year the loss was sustained.
e. Exercise
AST Corporation has the following data for the years 2009 and 2010:
2009: Gross income P250,000
Business expenses 180,000
Capital loss (capital asset was acquired on January 15, 2009 and was sold on March 15, 2009) 50,000
Capital gain (capital asset was acquired on January 15, 2007 and was sold on March 31, 2009) 30,000
2010: Gross income P500,000
Business expenses 400,000
Capital gain (capital asset held for 12 months) 60,000
Capital loss (capital asset held for more than 12 months) 20,000
Question 1 - How much is the taxable net income in 2009 and 2010?
2 - Assuming the taxpayer is an individual taxpayer, single resident citizen, how much is the taxable net income
in 2009 and 2010?

TX-
ReSA: The Review School of Accountancy Page 2 of 3

4. General professional partnership


Accounting for capital gains Capital gains or losses of the general professional partnership will be accounted for by
or losses of general the partners in proportion to their interest in the partnership.
professional partnership

5. Sales of Capital Assets Which Are Subject to Capital Gains Tax (Final Tax)
a. Sale of shares of stock not traded in the local stock exchange (5% and 10% based on net capital gains)
b. Sale of real property classified as capital asset (6% based on selling price or FMV whichever is higher)

6. Transactions Resulting in Capital Gains or Losses (No Sale or Exchange)


a. Worthless shares of stock If shares of stock become worthless during the taxable year and are capital assets, the
loss shall be considered as a loss from the sale or exchange of capital assets on the last
day of such taxable year.
b. Worthless bonds If bonds, debentures, or other evidence of indebtedness of any corporation (including
those issued by the Government) are ascertained to be worthless and charged off within
the taxable year and are capital assets, the loss shall be considered as a loss from the
sale or exchange of capital assets on the last day of such taxable year.
c. Retirement of bonds Amounts received by the holder upon the retirement of bonds, debentures or other
evidence of indebtedness issued by any corporation (including those issued by the
government) with interest coupon or in registered form, shall be considered as amounts
in exchange thereof.
d. Short sales of property Gains or losses from short sales of property shall be considered as gains or losses from
sales or exchanges of capital assets.
e. Option gains or losses Gains or losses on account of failure to exercise a privilege or options to buy or sell
property are considered as capital gains or losses as the case may be.
f. Liquidating dividends When a corporation distributes all of its assets in complete liquidation, the gain or loss
sustained by the stockholder, whether individual or corporate, is capital gain or losses as
the case may be.
g. Liquidation of partnership When a partner retires or the partnership is dissolved, he realizes gain or loss as follows:
Amount received for his interest xxx
xxx
Less: Investment xxx
Share in the undistributed partnership income which has been
reported as income xxx xxx
Gain (loss) xxx

7. Exercises
1) In 2009, a general professional partnership was organized. Binky Reyes contributed P500,000 for a 60% interest. The
partnerships net income in 2009 was P750,000, and in 2010 P800,000. The net income in 2009 was distributed to the
partners while no distribution of income was made in 2010.
In 2011, the partnership was dissolved, and Ms. Reyes received P700,000 as her share in the liquidation.
How much was the capital gain (loss) of Binky in 2011?

2) Rowena expects that within a week, the market price of Angeles Corporation shares, which is selling at P10 per share, is
going down. She does not have Angeles Corporation shares so she calls up her stockbroker and asks him to sell for her
10,000 shares of Angeles Corporation shares. Rowena and the stockbroker agree that the sold shares are to be replaced
within one week after the sale.
The stockbroker sells for Rowena the 10,000 shares at P10 per share. One week after, when the sold shares are about to
be replaced, the selling price of Angeles Corporation shares rises to P16 per share, contrary to Rowenas expectation.
Nevertheless, she orders her stockbroker to buy for her 10,000 Angeles Corporation shares to cover the same number of
shares she borrowed a week ago.
How much is the capital gain (loss) from the short sale?

3) A single taxpayer has the following income, expenses and transactions in 2011:
Gross sales P500,000
Cost of sales 350,000
Business expenses 75,000
Health insurance premium paid 2,000
Selling price, partnership interest (investment in 2004 was P20,000) 60,000
Gain on sale of personal car held for 3 years 10,000
Loss on sale of jewelry for personal use held for 6 months 5,000
Loss on account of failure to exercise two-month option to buy 4,000
Liquidating dividend (investment in 2009, P100,000) 80,000
Gain on short sales 2,000
Question 1 - Compute the net capital gain (loss)
2 Compute the taxable net income using: a. itemized deduction. b. optional standard deduction.

-=END=-

_____________________________________________________________________________
Taxation: Income Tax - Capital Assets (BATCH 22)
TX-1001
ReSA: The Review School of Accountancy Page 3 of 3
THOT: Not everything that counts can be counted. Not everything that can be
counted counts.
jb

_____________________________________________________________________________
Taxation: Income Tax - Capital Assets (BATCH 22)
TX-1001

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