Subject Code: ACT25

Subject Title: Income Taxation

No. of Units: 3
MODULE 8:
INCOME TAX ON PARTNERSHIPS, ESTATES, AND TRUSTS
I. Pre-test / Activity
1. For purposes of taxation, which of the following statements regarding partnership is correct?
I. Classified into two major categories, partnership in trade and general professional partnership.
II. Partnership in trade is exempt from income tax.
III. General professional partnership is taxable as a corporate taxpayer.
A. I, II and III
B. I and II
C. I and III
D. I only
2. A partnership is formed by persons for sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
A. Trading partnership
B. Joint venture
C. General professional partnership
D. Joint accounts
II. Content
A. CLASSIFICATION OF PARTNERSHIPS
For income tax purposes, there are two kinds of partnerships, namely:
1. General professional partnerships are 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 (Sec. 22 B,
NIRC).
2. Commercial partnerships are partnerships wherein all or part of their income is derived from the conduct of
trade or business. Business/Taxable Partnership/Partnership in Trade
B. GENERAL PROFESSIONAL PARTNERSHIP
General professional partnership and its partners are subject to the following rules:
1. A general professional partnership shall not be subject to income tax (Sec. 26, ibid.);
2. The partners shall be liable for income tax only in their separate and individual capacities;
3. For purposes of computing the distributive shares of the partners, the net income of the general professional
partnership will be computed in the same manner as that of the net income of a corporation;
4. Each partner shall report as gross income his distributive share, actually or constructively received, in the net
income of the partnership;
5. Income payments made periodically or at the end of the taxable year by a general professional partnership to the
partners, such as drawings, advances, sharings, allowances, stipends and the like, are subject to 15% if the
payments to the partner for the current year exceeds ₱720,000 and 10% creditable withholding tax, if otherwise
(RR Sec. 3 H, 02-2010).
The partnership itself is required to file income tax returns (1702-EX) for the purpose of furnishing information as to
the share in the gains or profits which each partner shall include in his individual return.
C. GENERAL PROFESSIONAL PARTNERSHIP TAX FORMULA
1. General professional partnership
Gross income ₱ xx
Less: Operating expenses ( xx )
Net income – Tax exempt xx
Add: Income subject to final taxes (net) xx
Total distributable income xx
2. Partners
Partner 1 Partner 2
Gross income – Business………..……………….. ₱ xx ₱ xx
Less: Expenses – Business..……………………. ( xx ) ( xx )
Net income……………………………………….. xx xx
Add: Share in GPP’s net income……………........ xx xx
Taxable income – Business..……………………... xx xx
Taxable income – Compensation………………… xx xx
Total taxable income.....................……………….. xx xx
Income tax due (0% - 35%)………………………. xx xx

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 Allowable Deductions to the Partners comprising GPP
The share of a partner in the net income of a GPP, actually or constructively received, shall be reported as taxable income
of each partner. RR 8-2018 implementing the income tax provisions of RA 10963 (TRAIN Law) also provides that, the
partners comprising the GPP can no longer claim further deductions from their distributive share in the net
income of a GPP and are not allowed to avail the 8% income tax rate option since their distributive share from the
GPP is already net of costs and expenses.

RR 8-2018 further provides that, if the partner also derives other income from trade, business or practice of profession
apart and distinct from the share in the net income of the GPP, the deduction that can be claimed from the other income
would either be the itemized deductions or OSD.

Illustration 1
Quiambao & Ramos law firm is a general professional partnership with partners Rey Quiambao and Danny Ramos
sharing equally in the partnership’s net profit or loss. Data for 2024 follows:
Quiambao & Ramos law firm:
Gross revenue…………………………………….. ₱750,000
Operating expenses….…………………………..... 250,000
Interest income, net of final taxes........................... 2,000
Dividend income from domestic corporation......... 10,000
Rey Quiambao:
Gross sales………………………………………. 170,000
Gross business income…..…….....……................ 100,000
Business expenses...…….....………….................. 37,500
Danny Ramos:
Gross sales………………………………………. 210,000
Gross business income…..……...……….............. 112,500
Business expenses...…….....………….................. 25,000

1. How much is the partnership’s income tax due and from each partner?
2. How much is the partnership’s income tax due assuming the partnership opted to use OSD?
3. How much is the partners’ income tax due assuming they opted to use OSD?
(Disregard the creditable w/tax on income payment by the GPPs to its partners)

D. COMMERCIAL PARTNERSHIPS
Commercial partnership and its partners are subject to the following rules:
1. The partnership is subject to the same rules as corporations (capital gain tax, final tax on passive income, regular
corporate income tax, and minimum corporate income tax. The partnership must file quarterly and year-end
income tax returns;
2. The taxable income of the partnership, less the income tax thereon, is the distributable net income of the
partnership;
3. The share of a partner in the partnership’s distributable net income of a year shall be deemed to have been actually
or constructively received by the partners in the same taxable year and shall be taxed to them in their individual
capacity. Such share will be subjected to final withholding tax of ten percent (10%) as if dividend.
4. All items of income (capital gain, passive, other income subject to the regular corporate income tax or MCIT)
shall go, net of tax to the distributable net income of the partnership.

Illustration 2
ZT Enterprises is a business partnership with partners Zeny Salvacion and Tina Tugade, who share equally in the
partnership’s net profit or loss. The partnership and the partners had the following data in 2024, its fifth year of
operations:
ZT Enterprises Zeny Salvacion Tina Tugade
Gross income..……………………… ₱ 1,250,000 ₱ 500,000 ₱ 650,000
Operating expenses………………… 750,000 240,000 375,000
Interest income, net of final taxes..... 2,000
Dividend income from domestic corp. 10,000
Quarterly income tax paid……......... 75,000 1,000 1,250
Partnership assets.............................. 18,000,000

How much is the income tax due from the partnership and the final tax on the share of each partner from the
distributable net income of the partnership?

E. CO-OWNERSHIP
There is co-ownership:
1. When two or more heirs inherit and undivided property from a decedent.
2. When a donor makes a gift of an undivided property in favor of two or more donees.
Co-ownership is not subject to tax when the co-ownership’s activities are limited merely to the preservation of
the co-owned property. The co-owners are only liable for income tax in their separate and individual capacities.
Co-ownership is subject to tax when the income of the co-ownership is invested by the co-owners in business; the
co-owners have in effect constituted themselves into a partnership. In such a case, the co-ownership shall be subject to

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 tax as a corporation. Co-ownership will be automatically converted into an unregistered partnership the moment, the
said common properties and/or the incomes derived from them are used as a common fund with intent to produce profits
for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.
The portions belonging to the co-owners in the co-ownership shall be presumed equal, unless the contrary is proved
(Art. 484, CC).

Illustration 3
Jasmine and Kristine Labnao inherited from their father a piece of land with an apartment thereon. The estate is not
under administration. Jasmine agreed to manage the property. Expenses for preserving the property and paying taxes are
taken from the property’s income. Data for 2024 follows:
Co-ownership:
Property gross income..……………………….. ₱ 150,000
Property expenses…………………………….. 36,150
Jasmine Labnao:
Gross business income…..………………......... 490,000
Business expenses...…….....……………......... 207,000
Kristine Labnao:
Gross business income…..………………......... 340,400
Business expenses...…….....……………........... 183,000

How much is the income taxes due from the co-ownership and from each co-owner?

F. JOINT VENTURES
1. Joint venture or consortium formed for the purpose of undertaking construction projects.
2. Joint venture or consortium for engaging in petroleum, coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service contract with the Government.
are not subject income tax, but each member of the joint venture shall be taxable on his/its share in the net come of the
joint venture.
3. A joint venture other that 1 and 2 is treated as a corporation and members of such are treated as if stockholders.
Illustration 4
DE Properties Inc. and F. Galang Development Corporation, both in the construction business, formed a joint venture to
build commercial buildings. They agreed to share the joint venture’s net income or loss in the ratio of 50:50. Data for
2024 follows:
DE Properties F. Galang Dev.
Joint venture Inc. Corp.
Gross income………………….. ₱ 62,500,000 ₱ 1,000,000 ₱ 1,125,000
Operating expenses……………. 25,000,000 250,000 312,500
Quarterly income taxes paid…… 187,500 225,000
Total assets................................. 170,000,000 190,000,000
How much is the income tax payable from the joint venture and from each member?

G. ESTATES AND TRUSTS

Estate is a term commonly used to denote the sum total of all types of property owned by a person at a particular time,
usually upon his death.
Trust is an agreement under which one person transfers title to specific property to another who agrees to hold or manage
it for the benefit of a third person. See figure 1.
An estate or trust is taxable if:
1. An estate under administration i.e. being settled in court (illustration 5)
2. A trust where the fiduciary is to accumulate income (illustration 6)
3. A trust where the fiduciary may, in his discretion accumulate or distribute the income (illustration 7)

Income of the property

Property (corpus)
transfers held the
property property in
to the trust for the
Grantor is Fiduciary means guardian, trustee, Beneficiary
the person executor, administrator, receiver, is the person
who conservator or any person/corporation for whose
establishes a acting in a fiduciary capacity for any benefit the
trust. person. (Sec. 22 J, NIRC) trust has been
created.
Figure 1 Trust relationship

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 Illustration 5
Mr. Ibarra died leaving properties and obligations. His will provided for the distribution of his estate among his heirs.
Special proceedings were instituted in court for the probate of the will and an administrator was appointed by the court
and now discharges his duties. The estate is now called “estate under administration.” The properties in the estate earn
income.

Illustration 6
Dante Joson transferred income-producing properties to Kenji Kodama, in trust and under the terms of the transfer, Mr.
Kodama should accumulate the income for the benefit of Laura Joson until the latter reaches the age of majority. The
property and accumulated income shall be turned over to Laura when she reaches the age of majority. Dante Joson is
called the grantor, Kenji Kodama is called the fiduciary, and Laura Joson is called the beneficiary.

Illustration 7
Gerry Morales (grantor) transferred income-producing properties to Oscar Noble (fiduciary), in trust and under the term
of the transfer Oscar Noble may pay the income from the property to Perry Morales (beneficiary) at regular intervals or
accumulate it under Mr. Noble’s discretion. The property and any undistributed income shall be turned over to Perry
when he finishes his college education.

H. ESTATE AND TRUST TAX FORMULAS

Taxable Estate
The taxable income will be determined in the same
way as that of self-employed individuals
There is a creditable withholding tax on the heir of
15%
Taxable Trust
The taxable income will be determined in the same
way as that of self-employed individuals
There is a creditable withholding tax on the
beneficiary of 15%

Estate Trust
Gross income……………………………………………. ₱ xx ₱ xx
Less: Business expenses…………..………………….. ( xx ) ( xx )
Amount of the income paid, credited, or
distributed to the heirs or beneficiaries………… ( xx ) ( xx )
Taxable income………………………………………… xx xx
Income tax (0% - 35%)……………..………………….. xx xx
Note: Taxable Estate and Trust are allowed to claim OSD (RR 16-2008)
Illustration 8
Mr. Rico Advincula died leaving an estate worth ₱4,500,000. The estate is in the hands of an executor. Ms. Joy
Advincula is the only heir to the estate. The estate and the heir had the following data for 2024:
Estate:
Gross rent income from the properties of the estate………………… ₱ 950,000
Expenses on rental properties.………………………………………. 105,000
Withholding tax 5% on the gross rent income……………..……….. 47,500
Distribution of current year’s income from estate’s properties to
Ms. Joy Advincula……………………………………................. 75,000
Income tax withheld from Ms. Joy Advincula (₱75,000*15%)…….. 11,250
Ms. Joy Advincula:
Business income……………………………………………………… ₱ 675,000
Business expenses.…………………………………………………… 230,000
How
much is the income taxes payable from the estate and from Ms. Joy Advincula?
(Disregard the creditable w/tax on income distribution to the heir of estate)

Illustration 9
Ms. Joan Barquilla created a trust designating her 5 year-old daughter as beneficiary. Under the terms of the trust, ten
percent (10%) of the income shall be distributed to the beneficiary, while the (90%) shall be left to accumulate and be
distributed when the beneficiary reach 21 years of age. During the year the trust had a gross income of ₱980,000 and
expenses of ₱290,000. There was a quarterly income tax paid of ₱15,500. How much is the income tax payable from the
trust?

I. REVOCABLE TRUSTS
Where at any time the power to re-vest in the grantor title to any part of the corpus of the trust is vested
1. in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, or
2. in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income
therefrom,
The income of such part of the trust shall be included in computing the taxable income of the grantor (Sec. 63,
NIRC).

J. CONSOLIDATION OF INCOME OF TWO OR MORE TRUSTS

Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary
in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax computed on such
consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable
income of the trust administered by him bears to the consolidated income of the several trusts. (Sec. 60 C2, ibid.)

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 Illustration 10
Mr. Gil Cuadra maintains two trust that name his minor son as common beneficiary. The terms of the trust provide that
no income shall be distributed to the beneficiary until his son becomes 18 years of age. Following are the data of the two
trusts:
Trust 1 Trust 2
Gross income…............ ₱ 240,000 ₱ 330,000
Expenses……………… 120,000 160,000

How much is the income tax payable from each trust?

K. TAX EXEMPTION OF EMPLOYEES' TRUST FUND

Employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of
some or all of his employees
1. if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and
2. if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used
for, or diverted to, purposes other than for the exclusive benefit of his employees.
Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in
which so distributed to the extent that it exceeds the amount contributed by such employee or distributee (Sec. 60 B,
ibid.).

III. Activity
Problem 1
LJ is one of the partners of LBJ Partnership, a general professional partnership. He is also engaged in a trading business of
his own. The following data were provided by LJ in 2024:
LJ's gross income from his trading business…………. ₱1,000,000
LJ's expenses from his trading business……………… 600,000
Interest income, BDO-Manila……………………….. 20,000
Share from the net income of LBJ Partnership……… 400,000
Royalty, books published in USA…………………… 150,000
Salaries as part time accounting professor (gross)…… 450,000
Required: Determine the correct amount of the following:
1. Income tax due of LBJ Partnership
2. Income tax due of LJ
(Disregard the creditable w/tax on income payment by the GPPs to its partners)

Problem 2
Louie and Floyd are partners in the following partnership:
Business
Partnership GPP
Gross income…………………………….. ₱800,000 ₱500,000
Deductible expenses …………………….. 420,000 375,000
Assets…………………………………….. 10,000,000 8,000,000

Personal Income and Expenses: Louie Floyd

Gross Income…………………………….. 525,000 580,000
Deductible expenses…………………….. 117,000 205,000
Dividend from Domestic Corporation…… 25,000 30,000
Dividend from foreign corporation………. 12,000 8,250
Prize………………………………………. 15,000 7,500
Royalty, books……………………………. 10,000 18,000
Additional Information: Partners agreed to share partnership income and losses as follows: Louie =30%; Floyd = 70%
Required: Determine the following:
1. Income tax payable of the business partnership
2. Income tax payable of the GPP
3. Income tax payable of Louie
4. Income tax payable of Floyd

Problem 3
Pedro died two (2) years ago leaving an undivided property deriving income from rentals. His heirs were Louie and Floyd.
The property is under administration through the decedent's executor. The following data were provided during the taxable
year:
Rental income of the estate (gross of 5% w/tax) .… ₱1,000,000
Deductible operating expenses (estate)…………. 500,000
Income distributed to Louie…………………….. 50,000
Income distributed to Floyd…………………….. 50,000
Dividend income from Domestic Corporation… 100,000
Interest income from U.S. $ deposits……………. 200,000
Interest income from peso deposits………………. 100,000

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 Personal Income/Expenses of the heirs: Louie Floyd
Gross Income…………………………………… ₱325,000 ₱380,000
Deductible expenses…………………………… 117,000 105,000
Dividend from Domestic Corporation…………. 25,000 30,000
Dividend from foreign corporation…………….. 12,000 8,250
Prize……………………………………………. 15,000 7,600
Royalty, books…………………………………. 10,000 18,000

Required: Determine the following:

1. Income tax payable of the estate
2. Income tax payable of Louie
3. Income tax payable of Floyd
(Disregard the creditable w/tax on income distribution to the heirs of estate)

Problem 4
Mr. Masigasig created a trust in favor of Pedro, A large sum of money was entrusted to BDO (Trustee), the income of which
is accumulated in favor of Pedro. The following data were provided:
Gross income of the trust……………………………….. ₱3,000,000
Deductible business expenses of the trust……………… 1,800,000
Income distributed to Pedro during the year…………… 200,000
Dividend income from Domestic Corporation…………. 100,000
Dividend income from resident foreign corporation……. 100,000
Interest income from U.S. $ deposits…………………… 200,000
Interest income from peso deposits…………………….. 100,000
Personal Income and Expenses of Pedro
Compensation income………………………………….. 800,000
Rental income (net 5% w/tax)…..…………………….. 475,000
Rental expenses…………………………………………. 80,000
Royalty income, books…………………………………. 300,000
Other royalty income…………………………………… 120,000
Dividend from Domestic Corporation…………………. 30,000
Dividend from foreign corporation…………………….. 8,260
Prize……………………..……………………………… 16,000
Lotto winnings………………………………………….. 10,000,000
Quarterly tax payments………………………………… 120,000
Required: Determine the following:
1. Income tax payable of the trust
2. Income tax payable of Pedro
(Disregard the creditable w/tax on income distribution to the beneficiaries of estate)

Annual Tax Table (January 1, 2023 and onwards)

Range of Taxable Income Tax Due = a + (b x c)
Basic Additional Of excess
Over Not over Amount rate over
(a) (b) (c)
- ₱250,000 - -
₱250,000 400,000 - 15% ₱ 250,000
400,000 800,000 ₱22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000