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Tax Issues on the Sale of Properties and Equipment

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Learning objectives:AcctgForPPe

  • VAT on sale of PPE
  • Income Tax on Gain or Loss on Sale of PPE
  • Accounting for the sale of PPE

VALUE-ADDED TAX ON THE SALE OF PPE

“RR 16-2005 SEC. 4.106-1. VAT on Sale of Goods or Properties . – VAT is imposed and collected on every sale, barter or exchange, or transactions “deemed sale” of taxable goods or properties at the rate of twelve percent (12%) (starting February 1, 2006) of the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged, or deemed sold in the Philippines.”

“RR 16-2005 SEC. 4.106-3. Sale of Real Properties . – Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. The fairness of the imposition of VAT on sale of Property and Equipment for businesses registered as VAT taxpayers is logically sound. This reason is because when the taxpayer acquired the property from a VAT seller, it has claimed input VAT credit thereon.

According to Sec 109 of the National Internal Revenue Code, the sale of real properties not primarily held for sale to customers of held for lease in the ordinary course of trade or business is exempt from VAT.

Conversely, RR 04-2007 states that sale of real properties held primarily for sale or held for lease in the ordinary course of trade or business of the seller is subject to 12% VAT.

RR 04-2007 went further stating that even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the
trade or business of the seller, the sale thereof is subject to VAT being incidental to the taxpayer’s main activity.

INCOME TAX ON SALES OF PPE

Any gain or (loss) on the sale of the property and equipment are taxable or (deductible) for income tax purposes.

ACCOUNTING FOR THE SALE OF PPE

Example: On December 2, delivery equipment which was originally costing 500,000 (exclusive of VAT) was sold at 112,000.00. The equipment has a 50,000 carrying value on the date of sale.

The accounting entry to record the transaction on Dec 2 is as follows:

Account Name

Debit

Credit

Cash

112,000.00

  

Accumulated depreciation – Delivery Equipment (500000-50000)

450,000.00

  

Delivery Equipment

  

500,000.00

Output VAT* (112000*12/112)

  

12,000

Gain on sale of fixed assets**

  

50,000

*Output VAT on the sale of equipment computed as (112000*12/112) should be reported in the VAT returns and VAT alphalist on December.

**Gain on sale of the equipment computed as selling price exclusive of VAT less the net book value (100,000-50,000) should be reported as other income subject to income tax. In case the sale resulted as a loss, the loss on sale is a deductible cost for income tax purposes.

 

 

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