INCOME TAX ON PARTNERSHIP

Partnerships for income tax purposes, are:

a. General professional partnerships; and
b. Other partnerships (e.g., in trade).
A general professional partnership is a partnership formed for the practice of a common
profession, no part of the income of which is derived from engaging in trade or business. Ex.
Two lawyers are in partnership for the practice of law. Not an example: A lawyer and a
Certified Public Accountant are in partnership for the practice of taxation.
1. General Professional Partnership
A general professional partnership is not subject to income tax. The partners are taxable
on their shares in the partnership net income, whether distributed or not (called
“distributable net income”) by the partnership.

Th arrive at the net income of the general professional partnership, the rules for
corporations will apply. The partnership may deduct from its gross income either:

a. The Itemized Deductions for expenses and losses; or

b. The Optional Standard Deduction, at 40% of its gross income.
On his own (personal) gross income, as he computes for his net income, the deduction
of the partner will be:
Rule 1. If the partnership uses the itemized deductions for costs and expenses in
computing its net income, the partner must use the Optional Standard Deduction in
computing his personal net income.
Rule2. If the partnership uses the Optional Standard Deduction in computing its net
income, the partner must use the itemized deductions for costs and expense in
computing his personal net income.

Case 1
AB Partnership: Assume partners A and B divided net income equally.

Gross Income P 800,000

Less: Itemized deduction 400,000
Net income 400,000
Income Tax P 0

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 Partner A Partner B
Gross Income- Share AB Net income (1/2 of P 400,000 P 200,000 P 200,000
Gross receipts from business -own 90,000 100,000
Total P 290,000 P 300,000
Less:
Optional Standard Deduction
40% of P 90,000 (own) (36,000)
40% of P 100,000 (own) (40,000)
Taxable Income P 254,000 P 260,000

Case 2
For a general professional partnership:

Gross income of the general professional partnership P 500,000

Less: Optional Standard Deduction (40% of P 500,000) 200,000
Distributable net income (income is not subject income tax) P 300,000

For Partner A

Share in partnership distributable net income at (½ of P 300,000) P 150,000

Own gross income (from gross sales of P 600,000) P 288,000
Less: Own itemized deductions 180,000 108,000
Taxable income P 258,000

2. PARTNERSHIP OTHER THAN GENERAL PROFESSIONAL PARTNERSHIP.

a. The partnership that is NOT a general professional partnership is considered a
corporation. The taxable income will be subject to the normal tax of 30%, or if the
partnership is in the fourth or subsequent year of operations, the normal income tax
of 30%, or the minimum corporate income tax of 2%, whichever is higher.
b. All items of income (capital gain subject to capital gain tax, passive income subject to
final tax, and other income subject to the normal or minimum corporate income tax)
will go, net of tax, to the distributable net income of partnership.
c. A partner may have actually received, or be considered to have constructively
received, his share in the distributable income, and will be subject to a final tax of
ten percent (10%) on it because it is like a dividend from a corporation.
d. A partnership that is not a general professional partnership is subject to any or all of
the following taxes:

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 1. Normal tax or RCIT;
2. Minimum corporate income tax;
3. Final tax on passive income;
4. Capital gain tax;
5. Profit remittance tax
but not to the improperly accumulated earnings tax.
Case
Assumed: Partners A and B share equally in the partnership net income or net loss.

Taxable income P 620,000

Less: Income tax at 30% 320,000
Distributable income P 300,000

Partner A Partner B
Share in Distributable income (1/2 each) P 150,000 P 150,000
Final tax at 10% P 15,000 P 15,000

Won gross sales (assumed amount) P 570,000 P 620,000

Less: Own costs and expenses (assumed 350,000 410,000
amount)
Taxable income P 220,000 P 210,000

3. LIMITED PARTNERSHIP
The limited partnership is a partnership with at least one general partner and a limited
partner or partners. A general partner is liable for partnership obligations not only with
his investment in the partnership, but with his properties not invested as well. A limited
partner is liable for partnership obligations only to the extent of his investment in the
partnership. An entity which is named Cruz and Col, Ltd. (an example) is a limited
partnership (announced by what is in its firm, name “LTD”.)

The income tax rules to apply to a limited partnership will be the same as the rules for a
partnership in trade.