Chapter 5 Taxation of Partnerships, Estates and Trusts

 Classification of Partnerships
For income tax purposes, there are two kinds of partnerships, namely:
1. General professional partnership is 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 any trade or business. (Sec. 22 B, NIRC)
 
2. Other Partnership is a partnerships wherein all or part of their income is derived
from the conduct of trade or business. AKA Business Partnership / Taxable Partnership /
Partnership in Trade

 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 (RR 02-2010)
2. The partners shall be liable for income tax only in their separate or 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 P720,000 and 10% creditable withholding tax, if
otherwise. (RR 11-2018) TRAIN law

The partnership itself is required to file income tax returns for the purpose of  furnishing
information as to the share in the gains or profits which each partner shall include in his
individual return.

 General Professional Partnership Tax Formula

1. General professional partnership

Gross income P xx
Less: Operating expenses ( xx )
Net income xx
Income tax P -0-

2. Partners
Partner 1 Partner 2
Gross income – Share in the partnership……… P xx P xx
Gross income – personal business……..……… xx xx
Totals….…………………………………………… xx xx
Less: Expenses – personal business…………. ( xx ) ( xx )
Taxable income…………………………………... xx xx
Income tax (Tax Table 0% - 35%)…………….. P xx P xx
Less: Withholding tax by the partnership…….. ( xx ) ( xx )
Income tax due……..……………………………. P xx P xx

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Illustration 1
Quiambao & Ramos law firm is a general professional partnership with partners Rey
Quiambao and Danny Ramos sharing equally in the partnership net profit or loss. Data for
the current year follow:

Quiambao & Ramos law firm:

Gross revenue……………………………………… P750,000
Operating expenses….…………………………..... 250,000
Rey Quiambao:
Personal business income…..…….....…………… 100,000
Personal business expenses...…….....………….. 37,500
Danny Ramos:
Personal business income…..…….....…………… 112,500
Personal business expenses...…….....………….. 25,000

The income taxes due from the partnership and from each partner are computed as follow:

1. General Professional Partnership

Quiambao & Ramos law firm

Gross income……………………………………… P 750,000
Less: Operating expenses………………………. (250,000)
Net income..........………………………………….. 500,000
Income tax.......................................................... -0-

2. Partners
(P500,000 / 2) Quiambao Ramos
Gross income - share in the partnership income...... P 250,000 P 250,000
Personal business gross income ………………….. 100,000 112,500
Totals..…………………………………………………. 350,000 362,500
Less: Personal business expenses………….…… (37,500) (25,000)
Taxable income……………………………………….. 312,500 337,500

Income tax due ……………………………………… 12,500 17,500

Less: Creditable withholding tax (P250,000 x 10%) (25,000) (25,000)
Income tax payable (overpayment)……………. (P 12,500) (P 7,500)

 Other Partnership
Other 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, normal tax, and minimum corporate income tax, but not
subject to the improperly accumulated profit 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;
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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 normal or
MCIT) shall go, net of tax to the distributable net income of the partnership.
Note: Partners are considered as stockholders

Illustration 2
ZT Enterprises is a business partnership with partners Zeny Salvacion and Tina Tugade,
sharing equally in the partnership net profit or loss. The partnership and the partners had
the following data in its fourth year of operations:

ZT Zeny Tina
Enterprises Salvacion Tugade
Gross revenue…………………. P 1,250,000 P 500,000 P 650,000
Operating expenses…………… 750,000 212,500 375,000
Quarterly income tax paid……. 125,000 5,000 3,250

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 are computed as follow:

1. Other Partnership

ZT Enterprises
Gross income………………………………………. P1,250,000
Less: Operating expenses……..………………… (750,000)
Taxable income…………………………………… 500,000

Normal income tax 30% ………………………….. 150,000

MCIT 2%............................................................... 25,000

Income tax………………………………………….. 150,000

Less: Quarterly income tax paid…………………. (125,000)
Income tax due…………………………………… 25,000

Taxable income……………………………………. 500,000

Less: Income tax…………………………………… (150,000)
Distributable net income………………………... 350,000

2. Partners
(P350,000 / 2) Salvacion Tugade
Share in the partnership distributable net income P 175,000 P 175,000
Final tax 10%....................................................... 17,500 17,500

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Personal business gross income ………………. 500,000 650,000

Less: Personal business expenses…………… (212,500) (375,000)
Taxable income…………………………………… 287,500 275,000

Income tax………………………………………….. 7,500 5,000

Less: Quarterly income tax paid…………………. (5,000) (3,250)
Income tax due……………………………………. 2,500 1,750

 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 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.

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 in preserving the property and payment of taxes are taken from the income of
the property. Data for the current year follow:

Co-ownership:
Property gross income..…………………………… P 150,000
Property expenses……………………………….... 36,150

Jasmine Labnao:
Personal business income…..…….....…………… 297,000
Personal business expenses...…….....…………… 107,000

Kristine Labnao:
Personal business income…..…….....…………… 240,400
Personal business expenses...…….....…………… 83,000 82
Chapter 5 Taxation of Partnerships, Estates and Trusts

The income taxes due from the co-ownership and from each co-owner are computed as
follow:

1. Co-ownership

Gross income……………………………… P 150,000

Less: expenses…………………………… (36,150)
Net income………………………………… 113,850
Income tax………………………………... -0-

2. Co-owners
Jasmine Kristine
(113,850/ 2) Labnao Labnao
Share in the co-ownership net income…. P 56,925 P 56,925
Add: Personal business income………… 297,000 240,400
Totals……………………………………… 353,925 297,325
Less: Personal business expenses……. (97,000) (83,000)
Taxable income………………………….. 256,925 214,325

Income tax………………………………... 1,385 -0-

 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 construction business
formed a joint venture to build commercial buildings. They agreed to share the joint venture
net income or loss in the ratio of 50:50. Data for the current year follow:
DE F. Galang
Properties Development
Joint venture Inc. Corp.
Gross income…………………. P 62,500,000 P 1,000,000 P 1,125,000
Operating expenses…………. 25,000,000 250,000 312,500
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Quarterly income taxes paid… 187,500 225,000

The income tax due from the joint venture and from each member is computed as follows:

1. Joint venture
Gross income……………………………. P 62,500,000
Less: Operating expenses…………….. (25,000,000)
Net income………………………………. 37,500,000
Income tax due………………………… -0-

2. Members
DE F.Galang
Properties Development
(37,500,000/ 2) Inc. Corp.
Share in the joint venture net income… P18,750,000 P18,750,000
Gross income – personal business..… 1,000,000 1,125,000
Total…………………………………….. 19,750,000 19,875,000
Less: Operating expenses…………… (250,000) (312,500)
Taxable income………………………… 19,500,000 19,562,500

Normal income tax……………………. 5,850,000 5,868,750

MCIT……………………………………. 395,000 397,500

Income tax……………………..…….… 5,850,000 5,868,750

Quarterly income taxes paid…………. (187,500) (225,000)
Income tax due……………………….. 5,662,500 5,643,750

 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 5-1.

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)

Figure 5-1 Trust relationship

Income of the property

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 Property (corpus)

transfers property to the held the property in trust for the

Chapter 5 Taxation of Partnerships, Estates and Trusts
eeans
person
guardian,
who establishes
trustee, executor,
a trust. Also
administrator,
referred toreceiver,
as a Grantor
conservatorBeneficiary
or any person/corporation
is the person foracting
whose in benefit
a fiduciary
the trust
capacity
has fo
b
(Sec. 22 J, NIRC)

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.

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Chapter 5 Taxation of Partnerships, Estates and Trusts

 Estate and Trust Tax Formulas

Taxable Estate Taxable Trust

The taxable income will be determined in The taxable income will be determined in
the same way as that of individuals the same way as that of individuals
Estate is allowed the same deduction from Trust is allowed the same deduction from
gross income as allowed to individuals. gross income as allowed to individuals.

In addition it can further deduct amount In addition it can further deduct amount of
of its income which is to be distributed its income which is to be distributed
currently to the heirs. currently to the beneficiaries.

NOTE: The amount allowed as a NOTE: The amount allowed as a deduction

deduction shall be included in computing
the taxable income of the heirs.
Estate is required to use only the calendar
accounting period.
There is a creditable withholding tax on
the heir of 15% (RR 11-2018) TRAIN law
(Sec. 61, 62, ibid.)
shall be included in computing the taxable
income of the beneficiaries.
Trust is required to use only the calendar
accounting period.
There is a creditable withholding tax on the
beneficiary of 15% (RR 11-2018) TRAIN law

Estate Trust
Gross income……………………………………………. P xx P xx
Less Expenses……………………………………….. ( xx ) ( xx )
:
Amount of the income paid, credited, or
distributed to the heirs or beneficiaries…. ( xx ) ( xx )
Amount of the income applied for the
benefit of the grantor……………………… ( xx )
Taxable income………………………………………… xx xx
Income tax (Tax Table 0% - 35%)..………………….. P xx P xx
Note: Taxable Estate and Trust are allowed to claim OSD (RR 16-2008)
Illustration 8
Mr. Rico Advincula died leaving an estate worth P4,500,000. 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 the current year:

Estate:
Gross rent income from the properties of the estate………………. P 450,000
Expenses on rental properties.………………………………………. 70,000
Withholding tax 5% on the gross rent income……………..………. 22,500
Distribution of current year’s income from estate’s properties to
Ms. Joy Advincula……………………………………................. 15,000

Ms. Joy Advincula:

Personal business income…………………………………………. P 75,000
Personal business expenses.……………………………………… 10,000

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Chapter 5 Taxation of Partnerships, Estates and Trusts

The income taxes due from the estate and from Ms. Joy Advincula are computed as follow:

1. Estate

Gross income……………………………. P 450,000

Less: Expenses………………………… (70,000)
Income distribution…………….. (15,000)
Taxable income……………………….. 365,000

Income tax……………………………….. 23,000

Less: Withholding tax………………….. (22,500)
Income tax due………………………… 500

2. Ms. Joy Advincula

Personal business income…..………… P 75,000

Income received from estate………….. 15,000
Total……………………………………… 90,000
Less: Personal business expenses….. (10,000)
Taxable income………………………… 80,000

Income tax……………………………… -0-

Illustration 9
Ms. Joan Barquilla created a trust designating her 5 year-old daughter as beneficiary.
Under the terms of the trust, twenty percent of the income shall be distributed to the
beneficiary, while the eighty percent shall be left to accumulate and be distributed when the
beneficiary reach 21 years of age. It was also provided in trust instrument that P20,000 of
each year’s income shall be used for the payment of premium on the life insurance of the
grantor. During the year the trust had a gross income of P980,000 and expenses of
P290,000. There was a quarterly income tax paid of P15,500. The income tax due from the
trust is computed as follows:

Trust
Gross income……………………………………………….. P 980,000
Less: Deductions -
Expenses……………………………………………. (290,000)
Income distribution to beneficiary (980,000*20%)...... (196,000)
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Income for the benefit of the grantor……………... ( 20,000)

Taxable income…………………………………………… 474,000

Income tax…………………………………………………… 48,500

Less: Quarterly income tax paid………………………….. (15,500)
Income tax due…………………………………………….. 33,000

 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)

 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.)

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…............ P 240,000 P 330,000
Expenses……………… 120,000 160,000

The income tax due from each trust is computed as follows:

Trust 1 Trust 2 Consolidated

Gross income………………………… P 240,000 P 330,000 P 570,000
Less: Expenses…………………….. (120,000) (160,000) (280,000)

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Taxable income……………………. 120,000 170,000 290,000

Income tax…………………………… -0- -0- 8,000

Allocation
Trust 1 P8,000 (120,000/290,000) P 3,310.34
Trust 2 P8,000 (170,000/290,000) P 4,689.66
Less: Income tax paid……………... (-0-) (-0-)
Income tax due…………………….. 3,310.34 4,689.66

 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.)

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