[Ask The Tax Whiz] Clarifications on tax compliance for lease accounting
In filing my Income Tax Return (ITR), is there a difference between how I report rent expenses in my financial reports and what I need to pay in taxes?
Yes, there is a difference between how you report your rent expenses in the financial report and how it translates to tax obligations. For lease, you generally report the total rent paid as an expense in your financial statements, which can reduce your taxable income.
With a conditional sale, you’re not just reporting an expense; you’re recording an asset and a liability, then recognize interest or depreciation. For detailed comparison, the particulars of the tax treatment for income tax are listed in the table below:
Are there other tax implications regarding leases and conditional sales? If so, what are they?
Aside from income tax, leases and conditional sales are subject to value-added-tax (VAT), expanded withholding tax (EWT) and documentary stamp tax (DST).
For VAT, leases are subject to input tax on rent expense upon paying, while for conditional sales, it depends if the sale exceeds or is less than 25% of gross sales for that year. If it is greater than 25%, the entire amount is taxable for VAT in the year it was sold, while if it is less than 25%, the VAT is recognized on the installment payments.
Meanwhile, EWT for leases is subject to 5% EWT, while conditional sale of personal property is considered as sale of goods, which has 1% EWT with interest expense of 15%. However, conditional sale for real properties will be pursuant to Revenue Regulation (RR) 02-98.
I will be entering a finance lease agreement and will recognize the right-of-use asset. With this, am I allowed to claim depreciation expense from the asset under lease as a deduction for income tax?
As per Revenue Memorandum Circular (RMC) 11-2024, the depreciation expense pertaining to the right-of-use asset shall not be treated as deductible expense for income tax purposes. Only the actual amount of rent paid or incurred, including other payments made to the lessor based on the lease agreement, shall be allowed as deductions in the computation of the net taxable income.
When entering a lease contract, do I apply for the same Documentary Stamp Tax (DST) for finance and operating lease?
For finance lease, the DST rates on debt instruments will apply. Meanwhile, operating leases will use the DST on lease agreements. – Rappler.com
The information provided in the article above is for general knowledge and information. If you have any thoughts, questions, or want to discuss the topic further in how it affects your business, CONSULT ACG at consult@acg.ph. We’re always happy to hear from you!