Partnership Defined persons bind themselves common fund, with th Two or more persons ma! profession (Art. 1 personality separa be constituted in any form, excep’ are contributed thereto, In whi ne necessary. Kinds of Partnership for Tax Purposes: General Professional Partnership (GPP) A partnership formed by persons for the ee purpose of exercising their common profession, a shall be noted » no part of income of which is derived from however, that the engaging in trade or business. Under Section tax gen tion of 26 of the T: r Income Tax of Pa ZZ Chater 6 rtnershipS “g contract whereby two or more money, property, oF industry to 3 he profits among themselves’ y also form a partnership for the exercise of | Code). Partnership has a juridical at of each of the partners. It may able property or real rights strument shall be defined as to contribute e intention of dividing t! A Partnership is 767 of the Civi te and distinct from th t where immovi ich case a public in ‘ax Code and pertinent revenue | GPPs shall pertain regulations, a GPP is not subject to income tax its ordi iot_ subject nly to its ordin and consequently to Greditable withholding tax. eae ior 3 However, a GPP is required to file income tax GPP ig subject 0 | return for the purpose of furnishing information final withholding as to the share of each partners in the net taxes on its income of the partnership which each partner passive incomes | shall include in his individual income tax return. as well as capital For this purpose, the net income of a GPP shall gains tax. | be computed in the same manner as a 3 / corporation. . at 290Partuerships Partners shall be liable for j i individual capacities. Each pe ei tax only in their separate and nus ner shall report as gross income his or her distributive share (actual or Constructive) in ine net income of the parinerstip- Income payments made Periodically or at the end of the taxable year made by a GPP to the Partners, such as drawings. advances, sharings, allowances, stipends, etc. is subject to 15% creditable withholding tax if the amount of income payment is more than P720,000, otherwise, 10% (RR 11-2018; TRAIN rai Sample Computation of a Partner’s Distributive Share in the net income of a GPP: Gross Income-GPP 1,000,000 Allowable deductions 400,000 Net income-GPP P600,000 P80,000 P20,000 P700,000* x Partner's P&L % 50% 50% 50% Share in Income P300,000 P40,000 P10,000 P350,000** *Total Distributable Income of the GPP. “Total Distributive share of a Partner Sample Computation of a Partner's Taxable Net Income: Gross compensation income (if any) P800,000 Gross business income (if any) 2,400,000 Allowable deductions from gross business income (1,200,000) Share in the Net income of the GPP** 300,000 Partner's Taxable Net Income 2,300,000 “The other incomes of the GPPs as shown above are not included in the computation of a Partner's taxable net income because those incomes were already subjected to Final withholding taxes on passive incomes or capital gain tax. . General Partnership (Commercial Partnership) general professional partnerships, whether registered or not), for income taxation purposes, are considered as corporations and are therefore taxed as such. Consequently, partners are considered shareholders, and therefore, Profits distributed to them are considered as dividends subject to final withholding tax. Being a final tax, the share of aid in the net income of a partnership subject to tax is not returnal ble in ¢ pa ner's Personal income tax return. Distributive Share i equal 0 oc partner's distributive share of the net income declared by the partnership for a taxable year net of tax. Partnerships (other than 291L tartnersheg, Z Sample Computation of a Partner's Distributive Share in the net income of a GP: Gross Income-GP P1.000.006 Allowable deductions 400,000 Net income-GP 600,000 30% RCIT” (180,000) { Net Income after Tax 420,000 80,000 20,000 520,000" x Partner's P&L % 50% 50% 50% |_Share in Income P 210,000 40,000 10,000 P260,000' *A General Partnership is subject to RCIT or MCIT, whichever is higher "Total Distnbutable income of the GPP "Total Disinbutive share of a Partner. The partner's share is treated as dividend income from a domestic corporation, hence, subject to final withholding tax on dividend income. Consequently, this ‘amount shall not be included in the computation of a Partner's taxable net income. Sample Computation of a Partner's Taxable Net Income: Gross compensation income (if any) 800,000 Gross business income 2,400,000 Allowable deductions from gross business income (1,200,000) Share in the Net income of the GP NA Partner's Taxable Net Income 2,000,000 ILLUSTRATION 1: De Leon, Bobadilla and Ocampo (DBO) is a general professional partnership. The partners are participating equally in the income and expenses of the GPP. The following are the data for the | partnership and the partners in 2018: DBO De Leon Bobadilla Ocampo Gross Income P5,000,000 3,500,000 + P2,000,000 2,800,000 Expenses 3,500,000 1,200,000 600,000 825,000 Income subject to final taxes (net) 600,000 200,000 200,000 200,000 Question 1: How much is the taxable income of the Partnership? < Answer: PO. A GPP is not subject to income tax (on its income derived from its operations). Nonetheless, itis subject to final taxes on passive income and capital es tax. In addition, the GPP is required to file its income tax return (on its ordinary income) in | order to determine the correct distributive share of the partners to be traced in their individual income tax returns. 292Jertnerships / i Question 2: How much is the distributive share of each partner in the income of the GPP? “> Answer: 700,000 Solution: Gross income of the GPP 5,000, 9,000,000 Allowable deductions (3,500,000) Net income from operations-GPP 1,500,000 Income subject to final taxes (net)** 600,000 Total distributable income of the GPP 2,100,000 Divide by 3 (Equal Sharing) al Distributive share of each partner** 700,000 _ €Q “The distributive share (from operations of the GPP) is subject to creditable withholding tax. The share of the partner from the GPP’s ordinary income Shall be included in the taxable net income or in the ITR of the partner. However, distributive share from income of the GPP already subjected to final withholding taxes including incomes exempt from income tax shall not be included in the computation of the partners’ taxable income because these incomes were already taxed and/or exempt from tax. Question 3: How much is the taxable income of De Leon in 2018? “Answer: P2,800,000 Solution: Gross income — De Leon 3,500,000 Allowable deductions 1,200,000) Net business income - De Leon 2,300,000 ADD: Distributive share in the income of the GPP [from operations (P1.5M /3)] Total Taxable income-De Leon Question 4: Assume the partnership is a general (commercial) partnership, how much is the taxable income of the Partnership and amount of applicable tax? “> Answer: P1,500,000; P450,000 Solution: Gross income 5,000,000 Allowable deductions __(3,500,000) _ Taxable income ~ P1,500,000_ (Q If the question is ‘taxable income”, it shall be interpreted as income subject to basic tax otherwise known as tetumable income. Partnerships, except GPPs, are taxable as corporations, hence, the applicable income tax is P450,000 computed as; P1.5M x 30% 293a urtuershg Wal ee ion in Question #4, how much is the A ion 5: Usit fi Question 5: Using the same assump! taxable income of Ocampo In 2018? ‘> Answer: P1,975,000 Solution: Gross income - Ocampo 2,800,000 Allowable deductions 325,000) Taxable income-Ocampo (2) The share in income of the commercial partnership is treated as dividend income from a domestic corporation subject to final tax which ig non-returnable. Therefore, it is not included in the determination of “taxable income”. Question 6: Using the same assumption in Question #4, how much is the final tax of each partner from their share in the income of the partnership? ~ Answer: 255,000 Solution: Gross income-Partnership P5,000,000 Allowable deductions __(3,500,000) _ Taxable income-Partnership 1,500,000 Less: Tax Due @ 30% ___ (450,000) _ Net income from operations after tax 1,050,000 ‘Add: Income subject to final taxes (net) ____ 600,000 Total distributable income of the partnership 1,650,000 Divide by 3 3 Distributive share of each partner P550,000 x FW Tax rate on dividend income 10% Final withholding tax of each partner ___P55,000_ Allowable Deductions to General Professional Partnerships ' RR 8-2018 provides that a GPP is not a taxable entity for income tax purposes since it is only acting as a “pass-through” entity where its nome 8 ultimately taxed to the partners comprising it. Section 26 of the i Cues Sena likewise provides that, “for purposes of computing ine trib itive share of the partners, the net income of a GPP shall be puted in the same manner as a corporation". As such, a GPP may a ther me itemized deductions allowed under Section 34 of the Ta eee (08D) Cee A aut to avail of the optional standa . rations in claimin i in an amount not exceeding forty percent 40% of its Goins 294Dartuerstis / In computing the taxable income of a GPP as defined under gection 31 of the Tax Code, as amended, the following may be allowed as deductions from the gross income: a. Itemized Deductions: Itemized expenses which are ordinary and necessary, incurred or paid for the practice of profession (refer also to discussions in Chapter 10 ~ Allowable deductions from gross income); or b. Optional Standard Deduction: 40% of gross income in lieu of itemized expenses (refer also to discussions in Chapter 12). 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 2 - Itemized and Optional Standard Deductions CASE A: Itemized Deductions Bobadilla (married with one dependent child) formed a partnership with Trinidad ( single), participating equally in the partnership's income and expenses. The following are the data for the partnership and the partners in 2018: BT Partnership Trinidad Bobadilla Gross Income P600,000 P350,000 P400,000 Operating Expenses 350,000 140,000 220,000 Question 1: Assuming the partnership is a GPP, how much is distributive share of Trinidad in the income of the partnership? Answer: 125,000 295Solution: GPP’s Gross income P600, a OPEX (950,000) _ GPP’s Distributable income 250,000 xP&L% Share in the net income of the GPP Question 2; How much is taxable income of Trinidad? Answer: P335,000 Gross income-Trinidad P350,000 OPEX (140,000) Net income 210,000 125,000 Share in GPP’s income __125,000_ Total Taxable income of Trinidad P335,000 Question 3: Assuming the partnership is a general partnership, how much is taxable income of Trindad? Answer: P210,000 Gross income-Trinidad OPEX Taxable net income - Trinidad {Q The share in income of the commercial partnership is treated as a “dividend income” from a domestic corporation (subject to final tax) which is non-returnable, It is not included in the determination of “taxable income”. CASE B: Optional Standard Deductions (OSD) Using the same data in CASE A but assuming the partnership opted to use OsD in computing its net income, answer the following: Question 1: How much is the distributive share of Trinidad in the income of the partnership assuming the latter is a GPP? Answer: 180,000 Solution? GPP’s Gross income P600,000 OPEX (P600,000 x 40%) (240,000) GPP’s Distributable income 360,000 x PAL % 50% Share in the net income of the GPP P180,000 296vas e Partnerships Question 2: How much is taxable ii ra Answer: P390,000 le income of Trinidad? eres income-Trinidad 350,000 ore (140,000) income 0 210,000 Share in GPP's income 180 000 Total Taxable income of Trinidad 390,000, In a partner derived other income from business or practice of profession, separate and distinct from the operations of a partnership, Such partner may use either itemized deductions or OSD in computing in own gross income. OSD is allowed only if it is clear that the partner opted to compute its net income under OSD instead of itemized deductions. Question 3: Assume the following: = Trinidad also opted to use OSD in computing its taxable business income = Gross Sales of Trinidad is P550,000 How much is taxable income of Trinidad? Answer: P510,000 Gross Sales-Trinidad P550,000 OPEX (I x 40%) (220,000) ' Net inconte? OOP 330,000 Add: Share in GPP’s income 180,000 Total Taxable income of Trinidad P510,000 £2 If OSD is availed by an individual taxpayer, the basis of 40% OSD is Gross Sales, not gross income Question 4; Assuming the partnership is a general partnership, how much is taxable income of Trindad? Answer: 210,000 ss income-Trinidad P350,000 OpEx 140,000) Taxable net income - Trinidad __P210,000_ 8 £Q) The share in income of the commercial partnership is treated as a “dividend income” from a domestic corporation (subject to final tax) which is non-returnable. Itis not included in the determination of “taxable income”. 297(e ER EXERCISES PROBLEMS P6.1. (Partnership) : U, married, has two dependent minor brothers. He is a partner of @ genera} professional partnership. He is also engaged in trading business of his own, The following data were provided by LJ in 2018: U's gross income from his trading business P1,000,000 U's expenses from his trading business 600,000 Interest income, BDO-Manila 20,000 Share from the net income of a general professional 400,000 Partnerships Royalty, books published in the 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 the partnership 2. Income tax due of LJ P6.2. (Partnership) Data for 2018 taxable year of Rivera & Reyes (RR) Partnership including the partners’ own income are as follows: RR Partnership Rivera Reyes Gross Income P2,000,000 P800,000 P1,000,000 Allowed Deductions 1,200,000 400,000 500,000 Drawing Accounts: Rivera 150,000 30,000 0 Reyes 120,000 0 20,000 Civil Status Single Married Profit and Loss Ratio 40%; 60% Case A: Assume the partnership is an ordinary Partnership, compute the following: 1. Tax due of the partnership 2. Tax due of Rivera 3. Tax due of Reyes Case B: Assume the partnership in Case A is a general professional partnership, compute the following: 1. Tax due of the partnership 2. Tax due of Rivera 3. Tax due of Reyes 298C—O Chatter / Z — ae a f~ CORTE rr Lae ofa Lactneshp 6.3. (Partnership) villamin and Francis are Partners in a vies ratios Were 3:6, During nova, ormmerclal partnership. Their profit the following data were provided: Data of the Partnership: Gross profit frot i Direct cost of ee ies 500,009 Business Expenses Bae Rental Income in business assets (net of tax) 142,500 Interest Income On peso bank deposits 20,000 Interest income on U.S. $ deposits under the 50,000 - expanded foreign currency deposit system ‘ Capital gain on sale of real property classified 300,000 as capital asset located in Q.c. ‘ Selling Price-P2M; FMV-2.5M; Cost-1.7M Quarterly tax payments 75,000 * Data of the Partners: Dividend Income from a resident foreign P120,500 | corporation earned by Villamin Dividend Income from a domestic corporation 85,000 , earned by Francis Royalty Income from Philippines earned by 35,000 ~ Francis Capital gain by Francis on sale of shares of 120,000 stock of a domestic corporation Selling Price-P300,000; FMV-300,000; Cost-180,000 Gross income from a sole-proprietorship 925,000 business of Villamin . Allowable business expenses of Villamin orooee ’ Quarterly tax payments Required: Determine the following: , Income tax payable of the partnership Income tax payable of Villamin Income tax payable of Francis ; Final tax on passive income of the partnership Final tax on passive income Final tax on passive income of Villamin of Francis DaRwre 299Chapter Evercises — Ienome lee ofe Cartrerhe 7. Capital gains tax of the partnership 8. Capital gains tax of Villamin 9. Capital gains tax of Francis P6.4. (Partnership) a Louie and Floyd are partners in the following partnership: Business Partnership Gross income. P800,000 Deductible expenses 420,000 Personal Income and Expenses: Louie Gross Income P 325,000 Deductible expenses 117,000 Dividend from domestic corporation 25,000 Dividend from foreign corporation 12,000 Prize, supermarket raffle 15,000 Royalty, books 10,000 Additional Information: GPP P500,000 375,000 Floyd P 380,000 205,000 30,000 8,250 7,500 18,000 Partners agreed to share partnership income and losses as follows: Louie = 30% (married with 2 dependent children); Floyd = 70% (single but supporting her 15 year old sister living with and dependent upon him for chief support). 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 payableé of Floyd