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SUGGESTED ANSWERS
Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

CHAPTER 13
INCOME TAXES OF PARTNERSHIPS, CO-OWNERSHIP &
JOINT VENTURES
Problem 13 – 1 TRUE OR FALSE
1. True
2. True – because it is withheld with final tax.
3. True
4. False – trading business income will make the partnership a commercial partnership.
5. False – still subject to final tax of 10%.
6. False – not all partnership, only commercial partnership.
7. False – tax exempt, but required to file.
8. False – the tax withheld is not a final tax but a creditable tax.
9. True – starting on the 4 th year of operation.
10. True

Problem 13 – 2 TRUE OR FALSE

1. False – Partner’s contributions to a partnership are not subject to tax.

2. False – subject to normal tax of individuals
3. True – if created through gratuitous transfer, not more than 10 years and no
contribution is made by the co-owners.
4. False – The income should be sourced from a general professional partnership.
5. True
6. True
7. True
8. True
9. True
10. False – co-venturers are taxable.
11. True
12. False – tax-exempt

Problem 13 – 3 Problem 13 – 4
1. C 1. B or C
2. A 2. C
3. B 3. B
4. A 4. B
5. B 5. C
6. C 6. A
7. A 7. A
8. B 8. B
9. B 9. A
10. A 10. A

Problem 13 – 5 D
Net income from trading business – as sole proprietor P500,000
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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Less: Share from net loss of the partnership 200,000

Net income before personal exemption P300,000
Less: Basic personal exemption 50,000
Net taxable income P250,000

The general professional partnership is not a taxable entity for income tax purposes since it is
only acting as a “pass-through” entity where its income is ultimately taxed to the partners
comprising it. (Sec. 2, Rev. Regs. No. 2-2010)

Accordingly, the partner’s share from net loss of general professional partnership is allowed to
be deducted from his net income deriving from other business because the GPP is only a “pass-
through” entity.

The partner’s share in the net loss of the general professional partnership operation is
deductible from the gross income of the individual partner. A general professional partnership is
not in itself an income taxpayer. (Tax vs. Del Rosario, Jr. 55 SCAD, 237 SCRA 324 [1994])

Problem 13 – 6 B
Net income from trading business – as sole proprietor P500,000
Less: Basic personal exemption 50,000
Net taxable income P450,000

A commercial partnership is taxable as a corporation, [Sec. 22 (B), NIRC].

Accordingly, the partner’s share from net income or loss of a commercial partnership shall not
be considered as addition or deduction (as the case may be) from his net income.

Problem 13 – 7 A
Net profit from trading business of the partnership P400,000
Less: Income tax (P400,000 x 30%) 120,000
Income after tax P280,000
Interest income, net of final withholding tax 4,000
Dividend income 10,000
Total income for distribution to partners P294,000
Divide by profit and loss ratio 2
Share of each partner P147,000
Multiply by dividend tax rate 10%
Income tax on the distributive share of Mitzi Baguingan P 14,700

Problem 13 – 8
1. Letter C
Net income (P400,000 – P160,000) P240,000
Multiplied by applicable income tax rate 30%
Income tax of the partnership P 72,000

2. Letter D
Partnership’s income after tax (P240,000 – P72,000) P168,000
Divided by profit and loss ratio 1/2
Share of A P 84,000
Less: Final tax (P84,000) x 10% 8,400
A’s share, net of final tax P 75,600

Problem 13 – 9
Computation of partnership’s net income:

1. Not in the choices = P71,250

J, Opting itemized deduction:
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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Gross income P325,000

Less: Allowable deductions P175,000
Charitable contributions, actual P15,000
Limit, lower (P325,000 – P175,000) x 5% 10,000 185,000
Net income of the partnership P140,000

J’s own business

Gross income P85,000
Less: Allowable deductions P35,000
Charitable contributions, actual P1,750, lower 1,750 36,750
Limit, (P85,000 – P35,000) x 10% = P5,000
Net income own business P 48,250
Add: Share of J in the partnership’s net income (P140,000 x 70%) 98,000
Total net income P146,250
Less: Personal exemptions (P50,000 + P25,000) 75,000
Net taxable income of J P 71,250

2. Letter D
R, Opting OSD. Note that in this option, it is assumed that the professional partnership also
used OSD because R.R. No. 2-2010 provides that partner should follow the deduction used
by the GPP. If the GPP used itemized, the partner should also used itemized in determining
his other income from trade or profession; if the partnership used OSD, the partner should
also use the same method of deduction.

Gross income P325,000

Less: OSD (P325,000 x 40%) 130,000
Net income of the partnership P195,000

R’s own business P65,000

Less: OSD (P65,000 x 40%) 26,000
Net income – own business P39,000
Add: Share of R in the partnership’s net income (P195,000 x 30%) 58,500
Total net income P97,500
Less: Personal exemption 50,000
Net taxable income of R P47,500

Problem 13 – 10 C
Net income from trading business of the partnership P400,000
Divided by profit and loss ratio 2
Share of each partner P200,000
Add: Compensation income 240,000
Total income before personal exemption P440,000
Less: Personal exemption 50,000
Net taxable income P390,000

Note: Interest income and dividend income have been subjected to final tax, hence, not to be
included anymore in an annual taxable income.

Problem 13 – 11
1. Letter A
The general professional partnership is exempt from income tax. Persons
engaging in business as partners in a general professional partnership shall
be liable for income tax only in their separate and individual capacities. Each
partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership. (Sec. 26, NIRC)
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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

2. Letter C
Total partnership’s net income not subjected
to final taxes (P1,400,000 + P200,000) P1,600,000

Partner X Partner Y
Partner X (P1,600,000 x 60%) P960,000
Partner Y (P1,600,000 x 40%) P640,000
Less: Personal exemptions 50,000 50,000
Net taxable income P910,000 P590,000

Tax on P500,000 P125,000 P125,000

Add: Tax on excess:
Partner X (P410,000) x 32% 131,200
Partner Y (P90,000) x 32% . 28,800
Income tax due P256,200 P153,800
Less: Creditable withholding taxes:
Partner X (P960,000 x 15%) 144,000
Partner Y (P640,000 x 10%) . 64,000
Income tax still due and payable P112,200 P 89,800

Inasmuch as the general professional partnership is only a “pass-through”

entity, the passive income that has been subjected to final taxes shall not
anymore be included in the taxable distributive share of each of the
partners. (Rev. Regs. No. 2-2010, February 18, 2010)

3. Letter B
Total partnership net income not subjected
to final taxes P1,600,000
Multiplied by corporate normal tax rate 30%
Income tax due P 480,000

4. Letter D
Total partnership net income after tax
(P1,600,000 – P480,000) P1,120,000
Add: Interest income, net of 20% final tax 80,000
Net income for distribution P1,200,000

Partner X Partner Y
Partner X (P1,200,000 x 60%) P720,000
Partner Y (P1,200,000 x 40%) P480,000
Multiplied by final tax on dividend 10% 10%
Final taxes on share of each partner P 72,000 P 48,000

The net income for distribution that will be subject to final tax should
include all income subjected to final taxes inasmuch as the commercial
partnership is not a “pass-through” entity. The dividend income received by
a partnership is exempt from income tax.

Problem 13 – 12
1. Letter D
None. The objective of co-ownership is to preserve the co-ownership property, therefore, not
subject to tax.

2. Letter B
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The co-owners in an exempt co-ownership are liable for the tax in the income they received
from the co-ownership. They should file the return and pay the corresponding tax based on
their separate and individual capacity.

The net taxable income of Robert is computed as follows:

Share from the income of co-ownership P1,000,000
Less: Personal exemption – single 50,000
Net taxable income P 950,000

Income received by the co-owners is already net of itemized deductions of the co-ownership,
therefore, the co-owners in their individual capacity is not anymore entitled to optional standard
deduction. Inasmuch as the related expenses have been deducted before the distribution of
income to the co-owners, [Sec. 34 (L), NIRC].

Supreme Court Ruling - Deductions and exemptions are highly disfavored in law. They must be
construed strictly against the taxpayer, (Commissioner of Internal Revenue vs. P. J. Kiener
Company, LTD., 65 SCRA 143).

Problem 13 – 13
1. Letter B
BIR Ruling (August 18, 1959) provides that the co-ownership shall be taxed as a corporation
if the property was not divided for more than ten (10) years. Therefore, the tax on the income
of the co-ownership would be:

Income of co-ownership P5,000,000

Multiply by corporate normal tax rate 30%
Income tax as corporation P1,500,000

2. Letter C
Final tax on dividend of Marjorie Sison:

Amount received from co-ownership P1,000,000

Multiply by final tax rate on dividend 10%
Final withholding tax on dividend income P 100,000

3. Letter D
The amount received by Grace Ann Subala shall no longer be reported in the ITR since it has
been subjected to final tax on dividend.

Problem 13 – 14 D
A joint venture for a construction project of the Government is not subject to income tax.
Consequently, gross payments to said joint venture are not subject to withholding tax. The joint
venture, being exempt from corporate income tax, is not required to file quarterly and final or
adjusted income tax returns. (BIR Ruling No. DA-415-2005 dated October 4, 2005)

Problem 13 – 15 C
Sales, net of VAT (P67,200,000/1.12) P60,000,000
Less: Costs, net of VAT (P44,800,000/1.12) 40,000,000
Gross income P20,000,000
Less: OSD (P20,000,000 x 40%) 8,000,000
Net taxable income P12,000,000
Multiplied by corporate income tax 30%
Income tax due P 3,600,000
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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

As a general rule, all partnerships, associations or joint ventures are to be taxed as a

corporation, except general professional partnerships and joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating or consortium agreement under a service
contract with the government. [Sec. 22 (B), NIRC]

Problem 13 – 16
1. The partnership is a general professional partnership, therefore, tax exempt.

2. and 3. Computation of tax liabilities of partners A and B.

Net income of the partnership (P1,200,000 – P700,0000) P500,000

Partner A = 60% Partner B = 40% Total

Partner’s salary P240,000 P360,000 P 600,000
Add: Distribution of partnership’s income 300,000 200,000 500,000
Total P540,000 P560,000 P1,100,000
Less Personal exemption 50,000 100,000
Net taxable income P490,000 P460,000

Tax on P250,000 P 50,000 P 50,000

Tax on excess (P240,000 x 30%) 72,000
Tax on excess (P210,000 x 30%) . 63,000
Income tax due and payable P122,000 P113,000

Problem 13 – 17
Gross income P575,000
Less: Business expenses 255,000
Net income before other income P320,000
Add: Taxable dividend – dividend received from a nonresident foreign corporation 60,000
Total net taxable income P380,000
Less: Income tax due (P380,000 x 30%) 114,000
Net income after tax P266,000

Note: Dividends received from domestic corporation by a general co-partnership is tax exempt.

Computation of partnership share considered as dividends:

M - 40% W – 60%
Net income (P266,000) P 106,400 P 159,600
Dividends from domestic corporation (P40,000) 16,000 24,000
Interest income, net of final tax of 20%, (P8,000) 3,200 4,800
Distributive partner’s share on general co-partneship P 125,600 P 188,400
Multiplied by final tax rate 10% 10%
Final tax on share on partnership income P 12,560 P 18,840
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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Note: In a general co-partnership, the share of individual partner is considered as dividend

income.

Problem 13 – 18
1 Not a government project
.
a. Contract price, excluding VAT (P112,000,000/1.12) P100,000,000
Less: Cost of construction, net of VAT (P72,800,000/1.12) 65,000,000
Gross income P 35,000,000
Less: Operating expenses 15,000,000
Net income P 20,000,000
Multiplied by corporate income tax rate 30%
Income tax due P 6,000,000

b. The shares of joint venturers, X Co and Y Co, are not

subject to income tax under inter-corporate dividend rule.

2 Government project (consortium)

.
a. Tax-exempt
X Co. Y Co.
b. Share of co-venturers in the net income (P20M x 50%) P10,000,000 P10,000,000
Multiplied by corporate income tax rate 30% 30%
Income tax due P 3,000,000 P 3,000,000

Note: OSD is not applicable to co-ventures because their respective shares are already net of
expense.

Problem 13 – 19
1 Not a government project
.
a. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000
Less: Cost of construction, net of VAT (P56,000,000/1.12) 50,000,000
Gross income P30,000,000
Less: Operating expenses 10,000,000
Net income P 20,000,000
Multiplied by corporate income tax rate 30%
Income tax due P 6,000,000

b. The share of joint venture partners X Co and Y Co is not

subject to income tax under inter-corporate dividend rule.

2 Government project (consortium)

.
a. Tax-exempt
X Co. Y Co.
b. Share of co-venturers in the net income (P20M x 50%) P10,000,000 P10,000,000
Multiplied by corporate income tax rate 30% 30%
Income tax due P 3,000,000 P 3,000,000

Alternative solution using OSD:

Note: If the joint venture opted to use OSD, it will have a lower income tax obligation, computed
as follows:

1. Not a government project

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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

a. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000

Less: Cost of construction, net of VAT (P56,000,000/1.12) 50,000,000
Gross income P30,000,000
Less: OSD (P30,000,000 x 40%) 12,000,000
Net income P18,000,000
Multiplied by corporate income tax rate 30%
Income tax due P 5,400,000

b The share of joint venture partners X Co and Y Co is not

.
subject to income tax under inter-corporate dividend rule.

2. Government project (consortium)

a. Tax-exempt
X Co. Y Co.
b Share of co-venturers in the net income (P20M x 50%) P9,000,000 P9,000,000
.
Multiplied by corporate income tax rate 30% 30%
Income tax due P 2,700,000 P 2,700,000

Problem 13 – 20
1. As a general co-partnership, the income tax of ATIN Partnership is computed as follows:

(a)
Gross income P500,000
Less: allowable deductions 100,000
Net taxable income P400,000
Multiplied by applicable tax rate 30%
Income tax of the partnership P120,000

(b) Income tax liabilities of the partners:

E. A. Co.

Distributive shares of the partners

(P400,000-P120,000) /2 P 140,000 P 140,000
Multiplied by applicable tax rate 10% 10%
Final tax on distributive share of partners P 14,000 P 14,000

2.
(a) As a general professional partnership, ATIN Partnership is exempted from income tax.

(b)
E. Cao A. Co.
Distributive shares of E. Cao and A. Co
(P500,000-P100,000)/2 P200,000 P200,000
Less: Personal exemption 50,000 50,000
Net taxable income P150,000 P150,000

Tax on P140,000 P 22,500 P 22,500

Excess P10,000 x 25% 2,500 2,500
Income tax P 25,000 P 25,000
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Less: Creditable withholding tax

(P200,000 x 10%) 20,000 20,000
Income tax still due and payable P 5,000 P 5,000

Problem 13 – 21
1. Letter D
200A Net loss per GAAP (P385,000)
Add (Deduct) Adjustments:
Nondeductible representation
expense [P300,000 - (P3M/60%) x 0.005] 275,000
Tax differential [(P40,000/80%) x 33%] 16,500
Nondeductible bad debts expense (P50,000 x 60%) 30,000
Contribution expense 200,000
Nondeductible income tax paid 375,000
Interest income subjected to final tax ( 40,000)
Net taxable income before contribution expense P471,500
Less: Deductible contribution expense (P471,500 x 5%) 23,575
Net taxable income – 200A P447,925

Since the fire loss and fire loss insurance recovery were both reported as expense and
income, there is no need for their adjustments.

2. Letter C
200B Net income per GAAP P1,478,000
Add (Deduct) Adjustments:
Nondeductible representation
expense [P400,000 - (P6M/60%) x 0.005] 350,000
Tax differential [(P48,000/80%) x 33%] 19,800
Nondeductible bad debts expense (P150,000 x 60%) 90,000
Contribution expense 400,000
Nondeductible income tax 500,000
Bad debts recovered without tax benefit
[P30,000 – (P50,000 x 40%)] ( 10,000)
Interest income subjected to final tax ( 48,000)
Net taxable income before contribution expense P2,779,800
Less: Deductible contribution expense (P2,779,800 x 5%) 138,990
Net taxable income – 200B P2,640,810

3. Letter C
Net taxable income – 200B P2,640,810
Multiplied by corporate normal tax rate 30%
Income tax due P 792,243
Less: Quarterly income tax paid – 200B 500,000
Income tax still due and payable P 292,243