Chapter 10

Taxation of
Partnerships
and Partners
Tuyan, Marilyn E.
Noarin, Ana
Orpia, Cyril
By the contract of partnership two
or more persons bind themselves to
contribute money, property, or
industry to a common fund, with the
intention of dividing the profits
among themselves. Two or more
persons may also form a
partnership for the exercise of a
profession.
Kinds of Partnership
1. Exempt Partnership
General Professional Partnership

partnerships formed by persons for

the sole purpose of exercising their
common profession, no part of the
income of which is derived from
engaging in any trade or business
Kinds of Partnership
1. Taxable Partnership
considered as corporations subject to
corporate tax.
The rules on corporate taxation such
as the filing of quarterly income tax
returns, the rules on deductibility or
non-deductibility of expenditures
incurred, the tax rates, etc. are
applicable on taxable partnerships.
Types of Taxable partnerships

Unregistered Business Unregistered

Partnerships Joint Ventures
not formally registered
with the appropriate not formally registered
government authorities. entities.
Despite their lack of However, for tax
registration, they are purposes, they are also
still subject to corporate treated as corporations
taxation. and are subject to
Treated as corporations corporate taxation.
and must comply with
the same tax rules as
registered partnerships.
Tax Liability of partners in a
partnership
1. Share in the net income of a general professional
partnership

Partners in a general professional partnership are

individually responsible for paying taxes on their
share of the partnership's profits, regardless of
whether the profits are actually distributed to
them or not.
Tax Liability of partners in a
partnership
In determining his distributive share in the net income of the partnership:

a. Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the partnership (Sec. 26,
NIRC).

b. Income payments made by a general professional partnership to

partners, such as drawings, advances, allowances, etc., are subject to
creditable withholding tax of 15% if gross income exceeds P720,000 in a
taxable year, and 10% if not.
Illustration
Alma and Lorna organized an accounting firm which they
named as Alma, Lorna and Associates. The profit and loss
sharing sharing ratio is 50% for Alma and 50% for Lorna. In
2018, the partnership had a gross income of P380,000 and
expenses (including salary) of P180,000. During the year,
each them received salary of 60,000 from the partnership.

1. Is the Partnership subject to income tax?

2. Is the partnership required to file an income tax return?
3. Assuming no profits were distributed to the partners,
how much share in the partnership income should be
reported by the partners in their income tax return?
Tax Liability of partners in a
partnership
1. Share in the income of taxable partnerships
a. A citizen or resident alien partner's share in the
distributable net income after tax of a partnership is subject
to a 10% final withholding tax, whether distributed or not.

b. A nonresident alien partner engaged in trade or business in

the Philippines will be subject to a 20% final withholding tax
on their share in the distributable net income after tax of a
taxable partnership.
Illustration
The following pertains to the 2022 data of KathDen Partnership, a
business partnership:
Gross income - 50,000,000
Deductions - 30,000,000
Partners Kathryn and Alden agreed on a profit and loss sharing ratio
of 60% and 40%, respectively
1. How much is the tax liability of the partnership if it avails of the
itemized deductions
Gross income 50,000,000
Less: Deductions (30,000,000)
_______________
Taxable income 20,000,000
Tax rate 25%
_______________
Income tax 5,000,000
Illustration
2. How much is the income tax on the share of Alden in the
partnership income if he is single?

Net income before tax 20,000,000

Less income tax (5,000,000)
_______________
Net income after tax 15,000,000
Partnership interest s 60%
_______________
Share in partnership income 9,000,000
Tax rate 10%
_______________
Final withholding tax 900,000
Optional standard deduction for
GPP and partners
A general professional partnership doesn't pay
taxes itself, but the partners are responsible for
paying taxes on their share of the partnership's
income. The partnership can deduct expenses in
two ways: by deducting specific expenses or by
using optional standard deduction allowed to
corporations in claiming the deductions in an
amount not exceeding 40% of its gross income.
General
Professional
Partnership
avails of OSD
If the general professional partnership avails of optional standard
deduction in computing its net income, the partners comprising it
can no longer claim further deduction from their share in the net
income for the following reasons:
1. The partner's distributive share in the general professional partnership is treated
as gross Income not his gross sales/receipts and the 40% optional standard
deduction allowed to individuals is specifically mandated to be deducted not from
his gross income but from his gross sales/receipts; and

2. The optional standard deduction being in lieu of the itemized

deductions allowed in computing taxable income will answer for both the
items of deduction allowed to the general professional partnership and its
partners.
Illustration 10-3 Felix is a partner of FA and Company, a
general professional partnership. and owns 25% interest.
The gross receipts of FA and Company amounted to
P10,000,000 for taxable year 2024. The recorded cost of
service and operating expenses of FA and Company were
P2,750,000 and P1,500,000, respectively.
COMPUTE for the net income of the partnership and the
income tax liability of Felix if the partnership of the

A. Optional Standard Deduction

B. Itemized deduction
Partner derives
income apart from
his share in the net
income of
professional
partnership
Illustration 10-4 AA and BB Partnership, a general professional partnership had the
following data during the year.
Gross receipts 1,400,000
Cost of services 600,000
Itemized deductions 400,000
Partners AA and BB have the following individual data:
Partner AA Partner BB
Salary as employee 200,000 175,000
Personal professional expenses 40,000 25,000
Share in partnership profit/loss 50% 50%
Interest on bank deposit 3,000 2,800
Gross income from personal business - 75,000
Expenses from personal business - 20,000
Transactions between a
partner and the partnership
It is not uncommon for a partner to independently engage in
transactions with the partnership. For example, a partner may
sell property to the partnership rather than make a capital
contribution of such property. In such transactions the partner is
generally treated as an outside independent party. Thus, gain or
loss is recognized on the sale of property by a partner to the
partnership, and the partnership receives cost basis equal to the
amount of consideration paid in the exchange transaction.
Co-ownership
There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons (Art.
484, CCP)
Non-Taxability of Co-Ownership
A co-ownership is exempt from tax if the activities of the co-
owners are limited to the preservation of the property and the
collection of the income therefrom.
Instead of being subjected to income tax, the income of the
co- ownership (and the deductions pertaining to its activities)
is divided among the co-owners based on their share in the
co-ownership. Thereafter, each of them will report his net
income on the basis of such distribution. That share of the co-
ownership is then added to the personal individual return of
each individual co-owner
Transformation of a co-ownership
into a partnership
To be considered a partnership, the partners must have an
unmistakable intention to form it. Thus:
A. The mere sharing of gross returns does not of itself establish a partnership, whether
or not the persons sharing them have a joint or common right or interest in any property
from which the retums are divided (Art. 1769(3) ibid.)
B. Co-heirs who own inherited properties which produce income should not
automatically be considered as partners of an unregistered partnership or corporation
subject to tax if there is no contribution or investment of additional capital to increase
or expand the inherited properties, merely continuing the dedication of the property to
the use to which it had been put up by their forebears (Obillos v. CIR).
C. A sale of co-ownership property at a profit does not necessarily establish that
intention.
Annual financial report

Thank you
very much!