INCOME TAXATION

MIDTERM
LEARNING OBJECTIVE
Define partnership.
Identify the classification of partnership.
Differentiate general professional partnership from
general co-partnership.
Discuss the tax liability of a professional partnership.
Identify tax liability of partners in a general co-
partnership.
Classification of Partnership
1. General professional partnership – One formed
by persons for the sole purpose of exercising their
common profession, no part of the income or which
is derived from engaging in any trade or business.

2. General co-partnership (compania collectiva) –

A general partnership which is not a general
partnership.
General Professional Partnership
Shall not be subject to the income tax but is
required to file annual income return/annual
information return for the purpose of furnishing
financial, non-financial information’s and share of
each partner.

Partners in general professional partnership shall

be liable for income tax in their separate and
individual capacities.
General Professional Partnership
When the result of partnership is a loss, the loss will
be divided as agreed upon by the partners. If no
agreement is made the losses shall be distributed
according to profit sharing ratio.

Share in the losses may be taken up by each partners

in their respective income tax return.
General Professional Partnership
GPP does not pay national income taxes.

The GPP serves as a “conduit” or “pass-through”

entity where its income is ultimately taxed to the
partners comprising it.
Distributive Share of Partners
For the purpose of computing the distributive share of
the partners, the net income of the GPP shall be
computed in the same manner as a corporation.

The GPP may claim either the allowed itemized

deductions or optional standard deduction (OSD)
allowed to corporations in claiming the deductions in
an amount not exceeding forty percent (40%) of its
gross income.
Distributive Share of Partners
The net income determined by either claiming the
itemized deduction or OSD from the GPP gross
income is the distributable net income from which
the share of each partner’s is to be determined.

Each partner shall report as gross income his distributive

share, actually or constructively received, in the net
income of the partnership.
Taxable Income Computation
All expenses which are ordinary and necessary,
incurred or paid for the practice of profession, are
allowed as deductions.

As a rule apart from the expenses claimed by the GPP

in determining its net income, the individual partner
can still claim deductions incurred or paid by him that
contributed to the earning of the income taxable to
him.
OSD for GPP and Partners
GPP may avail of the OSD only once, either by the
GPP or the partners comprising the partnership.

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
Mr. JMLH is a partner of AMBS & Cp., a general
professional partnership, and owns 25% interest. The
gross receipt of AMBS & Co. amounted to P10,000,000
for taxable year 2018. The recorded cost of service and
operating expenses of AMBS & Co. were P2,750,000
and P1,500,000, respectively.

Compute the share of JMLH in profit using:

1. Itemized deductions
2. Optional Standard Deduction (OSD)
Solution-Using Itemized Ded.
Gross receipts 10,000,000
Less: Cost of Services 2,750,000
Gross Income 7,250,000
Less: Operating Expenses 1,500,000
Net income for distribution 5,750,000
Share % of JMLH 25%
Taxable share in income 1,437,500

Tax Due
800K – P130,000
637.5K - 191,250 P321,250
Solution-Using OSD
Gross receipts 10,000,000
Less: Cost of Services 2,750,000
Gross Income 7,250,000
Less: OSD (P7.25 x 40%) 2,900,000
Net income for distribution 4,350,000
Share % of JMLH 25%
Taxable share in income 1,087,500

Tax Due
800K – P130,000
287.5K - 86,250 P216,250
Rules on Allowable Deduction from Partners
Share in GPP Income

1. If the GPP availed of the itemized deductions in

computing its net income, the partners may still claim
itemized deductions from said share, provided, that,
in claiming itemized deductions, the partners is
precluded from claiming the same expenses already
claimed by the GPP.
Rules on Allowable Deduction from Partners
Share in GPP Income
2. If the GPP avails OSD in computing its net income,
the partners comprising it can no longer claim further
deductions from their share in the said net income for
the following reasons:

a. The partner’s distribution share in the GPP is treated

as his gross income not his gross sales/receipts and the
40% OSD allowed to individuals is specifically
mandated to be deducted not from his gross income
but from his gross sales/receipts; and
Rules on Allowable Deduction from Partners
Share in GPP Income

b. The OSD being in lieu of the itemized deductions

allowed in computing taxable income as define under
Section 31 of the Tax Code, it will answer for both the
items of deduction allowed to the GPP and its
partners.
Rules on Allowable Deduction from Partners
Share in GPP Income

3. Since one-layer of income tax is imposed on the

income of the GPP and the individual partners where
the law had placed the statutory incidence of the tax in
the hands of latter, the type of deduction chosen by
the GPP must be the same type of deduction that
can be availed of by the partners.
Rules on Allowable Deduction from Partners
Share in GPP Income
4. If the partner also derives other gross income from
trade, business or practice of profession apart and
distinct from his share in the net income of the GPP,
the deduction that he can claim from his other gross
income would follow the same deduction availed of
from his partnership income. Provided however, that if
the GPP opts for the OSD, the individual partner may
still claim 40% of its gross income from trade,
business or practice of profession but not to include
his share from the net income of the GPP.
Rules on Allowable Deduction from Partners
Share in GPP Income
5. Each partner shall report his distributive share,
actually or constructively received in the net income of
the partnership as gross income.

The share of a partner shall be subject to 10% creditable

withholding tax.

If the income payments to the partner for the current

year exceeds P720,000, the withholding tax is 15%.
Illustration
For the taxable year 2014, Noy and Nay, partners of a general
professional partnership agreed to divide profits and losses
50:50, respectively. Both are married without qualified
dependents. The following are the details of the account:

Sale of Service -GPP P2,500,000

Cost of Service -GPP 875,000
Itemized Deductions - GPP 825,000
Salaries of Noy from GPP 360,000
Travelling expenses of Noy 34,500
Depreciation of Noy car 150,000/YR.
Solution – Distributable Income
Itemized OSD
Sale of Services P2,500,000 P2,500,000
Less: Cost of services 875,000 875,000
Gross Income 1,625,000 1,625,000
Less: Itemized Ded. 825,000
OSD (40% of GI) 650,000
Distributable income 800,000 975,000

Noy share (50%) 400,000 487,500

Solution- Noy Taxable Income
Itemized OSD
Share from GPP P400,000 P487,500
Less: Additional Ded.
Travelling 34,500 0
Depreciation 150,000 0
Net Share in GPP 215,500 487,500
Add: Salary from GPP 360,000 360,000

Taxable Income 575,500 847,500

General Co-Partnership
These are considered as corporations and are therefore
taxed as corporations.

Partners are considered as stockholders and therefore,

profits distributed to them by the partnership are
considered as dividends.

The share of an individual partner in a taxable

partnership is subject to final tax of 10%.
Illustration
Jerome, single is a partner in GR Partnership, a taxable
partnership. It is agreed upon that Jerome is to receive
75% share in the profit and loss of partner Angela 25%.
Following are pertinent data:

Gross income of GR P1,000,000

Expenses of GR 300,000
Solution
Gross income P1,000,000
Less: Expenses 300,000
Taxable income 700,000
Tax due (P700K x 20%) 140,000
Net income after tax 560,000
Jerome profit share 75%
Jerome share 420,000
Tax rate (FT) 10%
Tax due 42,000
Co-ownership
A co-owner shall not be subject to income tax if the
activities of the co-owners are limited to the preservation
of the property and the collection of the income there
from.

The co-owners who are taxed individually on their

distributive share in the income of the co-ownership.

Should the co-owners invest the income in business for

profit, they would be constituting themselves into a
partnership and such shall be taxable as a corporation.
Illustration
After the death of their parents, A and B, both single
individuals inherited a P 4,000,000 worth building
through intestate succession.
During the year the building has a gross income of
P800,000 which was divided equally between A and B.
Co-owners opted to avail of OSD.

A. How much is the income tax of the co-ownership?

B. How much is the income tax of co-owners?
Solution
A. There is no income tax to be imposed on the co-
ownership.
B. Income tax of co-owners is computed as follows
A B
Gross income P400,00 P400,000
Less: OSD 160,000 160,000
Taxable income 240,000 240,000

Tax due Exempt Exempt

Joint Venture
In the Philippines, a business activity that is organized
or established only for a temporary or short period of
time. It is dissolved once its business objective is
accomplished.

It is similar to a partnership in terms of the joint

venture partners commonality of interest, mutual
right of control and mode by which profits or losses
are shared.
Income Tax of Joint Ventures
An unincorporated joint venture is taxed like a
corporation. The share of the joint venture partners
will no longer be taxable to them because they partake
of dividends if paid to a domestic or resident
corporation.
However, joint venture formed for the purposed of
undertaking a construction project or engaging in
petroleum operations pursuant to the consortium
agreement with the Philippine government is not
subject to the corporate income tax.
Illustration
X Co. and Y Co., both domestic corporation, form a
joint venture to construct a building with a contract
price excluding VAT amounting to P50,000,000. The
joint venture incurred total construction cost
amounting to P40,000,000 and used OSD. The
corporations agreed to share any income or losses
equally.
If the construction project is a private business
contract, what will be the income tax liability of the
joint venture?
Solution
Contract Price P50,000,000
Less: Construction cost 40,000,000
Gross income 10,000,000
Less: OSD (P10M x 40%) 4,000,000
Net income of joint venture 6,000,000
Corporate Tax rate 25%
Income Tax due 1,500,000
The End