PARTNERSHIP

INCOME TAX OF PARTNERSHIPS

For purposes of the income tax, partnerships are classified into:

(a) Partnership not subject to income tax; and

(b) Partnership subject to income tax.
A. Partnerships Not Subject to Income Tax

The following partnerships are not subject to income tax:

1. General Professional Partnership ("GPP") - A partnership formed

by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging
in trade or business.

Note: Because of the exemption of GPPS from the income tax,

income payments to them by their clients are exempt from
creditable withholding tax.
2. A joint venture or consortium formed for the purpose of

(a) undertaking construction projects; or

(b) engaging in petroleum, coal, geothermal, and other energy
operations pursuant to an operating or consortium agreement under
a service contract with the government.

Filing of Return

Exempt partnerships are required to file an annual information

return (BIR Form No. 1702 EX). However, the purpose is to furnish
information as to the share each partner shall report and include in
his personal income tax return.
Tax Liability of Partners in Exempt Partnership

(a) Persons engaging in business as partners in a GPP shall be liable for income
tax only in their separate and individual capacities.

(b) Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.

The share of a partner in the net profits of the partnership shall be taxable to
the partner, whether distributed or not.

But where the result of the partnership operation is a loss, the loss will be
divided among the partners in the same proportion as the net income, or as
provided in the partnership agreement. Each individual partner may then take
up his share in the loss in his income tax return as a deductible loss.
(c) The share of a partner shall be subject to a creditable withholding tax
of 10% if the current year's income payments to the partner total
P720,000 or below, or 15% if the same exceeds P720,000.

(d) For purposes of computing the distributive share of the partners, the
net income of the partnership shall be computed in the same manner as a
corporation.

The distributable net income of the GPP may be determined by claiming

either Itemized Deductions or OSD.
(e) However, the partners comprising the GPP can no longer claim further
deductions from their distributive shares in the net income of the GPP.

The partners of a GPP are also not allowed to avail of the 8% income tax rate
option since their distributive share from the GPP is already net of costs and
expenses.

If a partner also derives other income from trade, business, or practice of

profession apart and distinct from his share in the net income of the GPP, the
deduction that can be claimed from this other income would either be the
Itemized Deductions or OSD.

Note: Co-venturers in a joint venture or consortium which is not subject to

income tax have the same tax liability as partners in an exempt partnership.
ITEMIZED & OPTIONAL STANDARD DEDUCTION

A. Itemized Deduction – Itemized expenses which are ordinary and

necessary, incurred or paid for the practice of profession or business.

B. Optional Standard Deduction (OSD) – 40% of Gross Income in lieu of

itemized expenses