RMC No. 89-2012 — Clarifies the tax implications and recording of deposits/advances made by clients of General Professional Partnerships for expenses

ATIRNSUELIC OF THE PHILIPPINES REAU DEPARTMENT OF FINANCE DF INTERNAL REVENUE December 27, 2012 BUREAU OF INTERNAL REVENU RECORDS MGT. DIWISHCN RECEIVED DEC 2 8 20t2 3 {: h0am

AE "REVENUE MEMORANDUM CIRCULAR NO. 89- 2012

SUBJECT : Clarifying the Tax Implications and Recording of Deposits/Advances

Made by Clients of General Professional Partnerships for Expenses

TO : All Internal Revenue Officers and Others Concerned

S Background

the Firm bills the Client for the professional fees, such deposits is taken into accoyint in the computation. used to cover necessary expenses; and/or (2) to pay in advance the necessary Firm, while the advances made by Firm shall thereafter be paid by the client. When after referred to as "Firm"), such as accounting firms or law firms: (1) to require their clients (herein after referred to as "Client") to deposit a sum of money to them to be expenses on behalf of their Client. The deposits shall thereafter be liguidated by the It is common business practice for General professional partnerships (herein

incurred on behalf of the Client are issued by the third-party establishments in the to gross income by both the Firm and the Client. As a result, the same expense is twice claimed as deductions contrary to the provisions of the Tax Code name of the Firm, instances occur when these expenses are claimed as deductions However, since the Official Receipts/Invoices covering these expenses

in accounting and recording such deposits/advances, as well as liquidation and payment of the pertinent expenses. Accordingly, this circular is being issued to provide guidelines to be observed

I Policies and Guidelines

1. Service Income of General Professional Partnerships

shall issue a corresponding Official Receipt. This amount received shalt be When the Firm receives cash deposits or advances from the Client, the Fifm

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booked as Income of the Firm. They shall form part of the Firm's Gross Receipts and subject to Value-added Tax (VAT), if applicable.

2. Claim for Deduction of Expenses

The Firm shall record the expenses it incurred and paid on behalf of the Client as its own expenses for income tax purposes if the official receipt/invoice issued by the third-party establishments is in the name of the Firm.

Accordingly, all these expenses, supported by Official Receipts/Invoices issued by third-party establishments in the name of the Firm, may be claimed by the latter as deductions from its gross income. Conversely, these expenses may not be claimed as deductions from the gross income of the Client.

On the other hand, :all payments made by the Client to the Firm shall be allowed as deduction from its gross income as professional fee/s provided that they are duiy substantiated by Official Receipts issued by the Firm pursuant to Section 34 (A)(1) of the Tax Code.

The Firm and Client, however, are not precluded from availing of the Optional Standard Deduction (OsD) provided under the existing tax laws, rules and regulations.

III. SUMMARY OF TRANSACTIONS/ PRO-FORMA ENTRIES

A. TrEatMENT WHEN THE

CLIENT MAKES A DEPOSIT FOR NECESSARY EXPENSES

1. Receipt and Recording of the Deposit

Upon receipt of the deposit/advances, the Firm shall issue an Official Receipt. if the Firm is utilizing a cash basis of accounting, it shall treat and record the same as Service Income. On the other hand, if the Firm is using accrual basis of accounting, it shall book deposit/advances as Unearned Income/Liability

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Accounting entries in the Books of the Firm

a) Cash Accounting: Cash Do XXX Co.

Output VAT Service Income XXX XXX

b) Accrual Accounting: Cash Dr XXX Cr

Deposits from Clients XXX Output VAT XXX

In turn, upon making deposit/advances for the necessary expenses, if the Client is using a cash basis of accounting, it shall treat such deposit/advances as an outright expense. However, if the Firm is using an accrual basis of accounting, such deposit/advances shall be treated as deferred expense/pre-payments.

Accounting entries in the Books of the Client

a) Cash Accounting: Professional Fees Do. XXX C

input VAT Cash XXX XXX

b) Accrual Accounting: Deposits to Professional Firms De XXX Cr.

Input VAT Cash XXX XXX

1 Payments made to third-party establishments

Receipt/invoice is issued in the name of the Firm, the latter shall record the same jas follows: When the deposit is used or spent for the necessary expense and the Official 3 BUREAU OF INYTRNAL REVENUE RECORDS MGT. EIVSION RECEIVEI DEC 2 8 20t2 $7 l1: h70 mm

Accounting entries in the Books of the Firm

a) Cash Accounting: Input VAT Expenses Cash D XXX XXX C XXX

b) Accrual Accounting:

Dr Co

Input VAT Expenses Cash XXX XXX XXX

Deposits from Clients Service Income XXX XXX

If the deposit is not sufficient to cover the expenses and the Firm makes the

necessary advances, the Firm shall record a receivable from the Client as

follows:

Accounts Receivable - Client Service income Dr XXX XXX C

3 Liguidation of the deposit and expenses

Upon liquidation of the deposit and expenses, the Firm shall make a summary

computation of all the expenses incurred.

If the deposit/s previously provided by the Client exceeds the total expenses

and such excess is returned by the Firm to the Client, the Firm shall record such

liquidation (return of the excess) as follows:

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Accounting entries in the Books of the Firm

a) Cash Accounting: Do Cr.

Input VAT Service Income Cash XXX XXX XXX

b) Accrual Accounting: Do Co

Deposits from Clients XXX Input VAT Cash XXX XXX

On the other hand, the Client, upon receipt of the excess deposit, shall record such liquidation as follows:

Accounting entries in the Books of the Client

a) Cash Accounting Cash Professional Fee/s Output VAT XXX Do Co XXX XXX

b) Accrual Accounting: Professional Fee/s XXX De Co

Cash Deposits to Professional Firms XXX XXX

Output VAT XXX

If the actuai expenses exceed the amount of deposits provided by the Client, the Client shall pay the Fim for such balance and the latter shall issue an Official

Receipt upon receipt of the cash and shall record such payment as follows:

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Accounting entries in the Books of the Firm

a) Cash Accounting: Dr. Co.

Cash Output VAT Service Income XXX XXX XXX

b) Accruai Accounting: Cash Accounts Receivable - Clients D XXX Co XXX

Output VAT XXX

The Client shall record the above transaction as follows:

Accounting entries in the Books of the Client

a) Cash Accounting: Input VAT Professional Fee/s Cash Do XXX XXX Co XXX

b) Accrual Accounting: Input VAT Professional Fee/s De. XXX XXX CO

Deposits to Professional Firms XXX Cash XXX

B. TReATMeNT WHEN NO

DEPOSIT FOR NECESSARY EXPENSES IS MADE BY THE Client: ADVANCES THE FOR FIRM THE neceSSaRY BEHALF OF THE CLIENT AND EXPENSES ON BUREAU OF INTERNAL REVENUE RECORDS MGT. DIVISIGN BILLS THE LATTER FOR THE SAME 6 RECEIVED DEC 2 8 20t2 SY 11:hoam

1. Payments made to third-party establishments on behalf of the Client

When the Firm advances for the expenses on behalf of the Client and the Official Receipt/Invoice issued by third party establishments is in the name of the Firm,-the latter shall record the same as follows:

Accounting entries in the Books of the Firm

a) Cash Accounting: Expenses XXX Dr. Co

tnput VAT XXX

Cash XXX

b) Accrual Accounting: Expenses Do. XXX CO

Input VAT XXX

Cash XXX

Accounts Receivable - Clients XXX

Service Income XXX

2. Collection of the Expenses made on behalf of the client

The Firm shall make a summary computation of all the expenses made on behaifj of the Client and shall bill the Client for the same. Upon receipt of the entire amount billed, the Firm shall issue an Official Receipt and shall record the transaction as fotlows:

Accounting entries in the Books of the Fim

a) Cash Accounting: Cash Do XXX Co

Service Income Output VAT XXX XXX

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b) Accrual Accounting: Dr. Co.

Cash Accounts Receivable- Clients XXX XXX

Output VAT XXX

The Client shall record such payment, whether cash or accrual accounting, as

follows: Accounting entries in the Books of the Client

Do Cr Professional Fee/s XXX Input VAT Cash XXX XXX

All revenue officials and employees are enioined to give this Revenue

Memorandum Circular as wide a publicity as possible.

This circular shall take effect immediately.

KIM S. JAAINfO-HENARES Commissioner of internal Revenue

013317 +

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