TAX ON PARTNERSHIPS, JOINT VENTURES and CO-OWNERSHIPS

INCOME TAX OF PARTNERSHIPS

For purposes of the income tax, partnerships are classified into:

1. Partnership not subject to income tax; and
2. Partnership subject to income tax

INCOME TAX OF JOINT VENTURES

For purposes of the income tax, joint ventures are classified into:
1. Joint venture not subject to income tax; and
2. Joint venture subject to income tax

A. PARTNERSHIPS/JOINT VENTURES NOT SUBJECT TO INCOME TAX

The following partnerships/joint ventures are not subject to income tax:

1. General Professional Partnership (GPP) – 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 trade or business.

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 Note:

Because of the
exemption of GPPs
from the income
tax, income
payments to them
by their clients are
exempt from
creditable
withholding tax.

2. A Joint Venture or consortium formed for the purpose of

a. Undertaking construction projects; or
b. Engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government.

(RR NO. 10-2012) A joint venture or

consortium formed for the purpose of
undertaking construction projects not
considered as corporation under Sec
22 of the NIRC of 1997 as amended,
should be:
a. Undertaking of a construction
project; and
b. Should involve joining or pooling
of resources by licensed local
contracts; Licensed as general
contractor by the Philippine
Contractors Accreditation Board
(PCAB) of the Department of
Trade and Industry (DTI);
c. Local contractors are engaged in
construction business; and
d. The Joint Venture itself must
likewise be duly licensed as
such by the Philippine
Contractors Accreditation Board
(PCAB) of the Department of
Trade and Industry (DTI).

Taxable only if: absent any one of the

aforesaid requirements, the joint venture
or consortium formed for the purpose of
undertaking construction projects shall be
considered as taxable corporations.

In addition, the tax-exempt joint venture

or consortium as herein defined shall not
include those who are mere suppliers
of goods, services or capital to a
construction project.

The member to a Joint Venture not taxable as corporation each shall be responsible in reporting and paying
appropriate income taxes on their respective share to the joint ventures profit.

Joint ventures involving foreign contractors

May also be treated as a non-taxable corporation only if the member foreign contractor is covered by:

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 a. A special license as contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
b. The construction project is certified by the appropriate Tendering Agency (government office) that
the project is a foreign financed/ internationally-funded project and that international bidding is
allowed under the Bilateral Agreement entered into by and between the Philippine Government and the
foreign / international financing institution pursuant to the implementing rules and regulations of Republic
Act No. 4566 otherwise known as Contractor’s License Law.

Filing of Return

Exempt partnerships are required to file an annual information return (BIR Form No. 1702 EX). However, the purpose
is to furnish information as to the share each partner shall report and include in his personal income tax return.

Tax Liability of Partners in Exempt Partnership

a. Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and
individual capacities.
b. Each partner shall report as gross income his distributive share, actually or constructively received, in the net
income of the partnership.

The share of a partner in the net profits of the partnership shall be taxable to the partner, whether distributed or
not.

But where the result of the partnership operation is a loss, the loss will be divided among the partners in the
same proportion as the net income, or as provided in the partnership agreement. Each individual partner may
then take up his share in the loss in his income tax return as a deductible loss.

c. The share of a partner shall be subject to a creditable withholding tax of 10% if the current year’s income
payment to the partner total P720,000 or below, or 15% if the same exceeds P720,000.
Gross income CWTAX
Gross income for the current year >P720,000 15%
Gross income for the current year ≤ P720,000 10%

d. For purposes of computing the distributive share of the partners, the net income of the partnership shall be
computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the
partnership.”

In relation thereto, Sec. 2.57.5(4) of RR No. 2-98, as amended, provides that GPPs are exempt from the
Expanded Withholding Tax (EWT). However, Sec. 2.57.2(H) of the same Regulations provide that the income
payments made periodically or at the end of the taxable year by a GPP to the partners, such as drawings,
advances, sharing’s and allowances, stipends, etc. shall be subject to 15% EWT if the income payments to the
partner for the current year exceeds P720,000; and 10%, if otherwise.

Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under
the Tax Code, setting forth the items of gross income and deductions and the names, TIN, Address and Shares of
each partner.

Gross income xxx Part of returnable income of

Allowable deductions (xxx) the partners
Net income xxx
Other tax exempt income xxx
Income subject to final taxes (net) xxx Non-returnable income of the
DISTRIBUTABLE INCOME of the partnership xxx partners
x P/L ratio of a partner %
DISTRIBUTIVE SHARE OF A PARTNER xxx*

*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.

Note: The GPP may claim either:

1. Itemized Deduction or
2. Optional Standard Deduction (OSD)

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Sample Computation of a Partner’s Distributive Share in the net income of a GPP
Income from Passive income net of Capital gain net of CGTs Total
Operations FWTx
Gross income -GPP X
Allowable Deductions (x)
Net income – GPP Px Px Px X*
X Partner’s P&L % % % %
Share in income X X X X**

*Total Distributable Income of the GPP

**Total Distributive share of a Partners

Sample Computation of a Partner’s Taxable Net Income:

Gross compensation income (if any) X
Gross business income X
Allowable deductions from gross business income (x)
Share in the net income of the GPP*** x (only share in Net income from business, do not include
Passive income, subject to Final tax Capital gain subject to CGTax
and Income exempted from tax)
Partner’s Taxable Net Income Xxx

***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 subject to either final withholding taxes on passive incomes or capital gain tax.

The distributable net income of the GPP may be determined by claiming either itemized deductions or OSD.

e. However, the partners comprising the GPP can no longer claim further deductions from their distributive shares in
the net income of the GPP.

The partners of a GPP are also not allowed to avail of the 8% income tax rate option since their distributive share
from the GPP is already net of cost and expenses.

If a partner also derives other income from trade, business, or practice of profession apart and distinct from his
share in the net income of the GPP, the deduction that can be claimed from this other income would either be the
Itemized Deductions or OSD.

Note:
Co-venturers in a joint venture or consortium which is not subject to income tax have the same tax liability as
partners in an exempt partnership.

Note:

A GPP is not subject to income tax and thus, payment to a GPP is not subject to creditable expanded
withholding tax. However, a GPP is subject to the applicable business tax. ... The same income payment may
also subject to either 3%/1% percentage tax or VAT. Payments from government entities are subject to 5%
withholding VAT.

1% percentage tax

Effective July 1, 2020 until June 30, 2023

OPT imposed on non-VAT registered entities and VAT registered entities whose aggregate non-VAT
exempt transactions do not exceed PHP3 Million shall be subject to a lowered OPT rate of 1%.

Determination of the Optional Standard Deduction for General Professional Partnerships (GPPs) and
Partners of GPPs.

GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the
partners shall be liable to pay income tax on their separate and individual capacities for their respective
distributive share in the net income of the GPP.

The GPP 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. Section 26 of the Tax Code, as amended, likewise

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 provides that- “For purposes of computing the distributive share of the partners, the net income of the GPP shall
be computed in the same manner as a corporation.” As such, a GPP may claim either the itemized deductions
allowed under Section 34 of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in
claiming the deductions in an amount not exceeding forty percent (40 %) of its gross income.

In computing taxable income defined under Section 31 of the Tax code, as amended, the following may be
allowed as deductions:
a. Itemized expenses which are ordinary and necessary, incurred or paid for the practice of Profession;
OR
b. Optional Standard Deduction (OSD).

The distributable net income of the partnership may be determined by claiming either itemized deductions or
OSD. The share in the net income of the partnership, actually or constructively received, shall be reported as
taxable income of each partner. The partners comprising the GPP can no longer claim further deduction from
their distributive share in the net income of the GPP and are not allowed to avail of the 8% income tax rate
option since their distributive share from the GPP is already net of cost and expenses.

If the partner also derives other 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 income would either be OSD
or itemized deductions.

Illustration of GPP

Arthur, married to Guinevere, has two dependent minor brothers. He is a partner of a general professional partnership. He
also has a trading business of his own. The following are data pertaining to taxable year 20x6:
Gross income, trading business P500,000
Expenses, trading business 100,000
Interest income, Maybank 20,000
Salaries as part-time teacher, gross of withholding tax 100,000

The general professional partnership had a gross income of P1,000,000 and expenses of P100,000. Arthur has a 1/3
share in the profits.

How much is the Arthur’s Taxable Income?

Gross Income, trading business P500,000

Expenses, trading business (100,000)
Salaries as part-time teacher, gross of withholding tax 100,000
Share in the Net Income of GPP: (P1,000,000 – P100,000) x 1/3 300,000
Taxable Income P800,000

NOTE:
1. Net income or distributable net income of a General Professional Partnership (GPP) shall be computed in the same
manner as that of a Corporation, as such, it may claim itemized deductions or optional standard deduction.

However, the partners’ distributive share from GPP income can no longer be subject to further deduction under RR
No. 8-2018.

Note also, that individual partners are not allowed to claim the 8% Flat Tax Rate on their distributive share from the
GPP since the same is already net of applicable deductions.

But, 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.

2. A GPP is exempt from tax, thus, the net income of P900,000 (P1M – P100,000) is already the distributable income to
the partners, 1/3 (P300,000) of which is the share of Arthur.
3. The share of a partner in a GPP’s net income shall be considered part of its taxable income subject to Income Tax in
their individual capacities.
4. The computation of the taxable income of a partner is just the same as in Taxation of Individuals with just the
inclusion of the share in the net income of GPP.
5. All other income, from trade, other business, rentals, etc. which are not subject to final tax or capital gains tax are
considered part of the computation of taxable income of a partner (individual).
6. The Final Tax rates applicable to individuals (for resident citizens, non-resident citizens, etc.) are also applicable to
the partners.

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7. The computation of the Income Tax is also the same for individuals, and the graduated income tax table shall apply.
8. Accordingly, Income Tax of Arthur would be P130,000, computed as follows:
First P400,000 P30,000
Excess over P500,000: (P800,000 – 500,000) * 25% 100,000
Total 130,000

9. The share of a partner in the net income of GPP is subject to 10% creditable withholding tax; or 15% if the gross
income for the year exceeds P720,000
10. In the above illustration, the P300,000 share of Arthur in the income of GPP is subject to 10% withholding tax. If the
withholding tax on the salaries as a part-time teacher amounted to P10,000, the income tax payable of Arthur would
be computed as follows:
Income Tax 130,000
Withholding Tax on Share in the Net Income of GPP (P300,000 * 10%) (30,000)
Withholding Tax on Salary (10,000)
Income Tax Payable P 90,000

Illustration of Non-taxable Joint Venture

San Miguel Construction and Asia Construction formed a joint venture to undertake a construction project. Profits are to
be shared equally. The following information relate to the individual operations of SMC and AC, as well as the operations
of the Joint Venture:
Asia Construction San Miguel Construction Joint Venture
Gross Income P20,000,000 P30,000,000 P150,000,000
Expenses 5,000,000 10,000,000 50,000,000

NOTE:
1. In the above illustration, if all the requisites of RR No. 10-2012 are present, the Joint Venture shall be treated as tax-
exempt and the taxability is similar to a GPP.
2. Accordingly, the Net Income of P100M (P150,000,000 – 50,000,000) is exempt from tax and is therefore the
distributable income to the joint venture parties.
3. SMC and AC, sharing equally the profits, would receive P50M each.
4. Since the joint venture is exempt from income tax, the share in the distributable income of SMC and AC shall form
part of the parties to the joint venture’s computation of taxable income. Accordingly, taxable income of the companies
are as follows:

Asia Construction San Miguel Construction

Gross Income P20,000,000 P30,000,000
Share in the exempt Joint Venture 50,000,000 50,000,000
Expenses (5,000,000) (10,000,000)
Taxable Income 65,000,000 70,000,000

5. If, however, the joint venture entered into is for a purpose other than those which are exempt, then the joint venture
shall be taxable as a corporation, and is therefore liable for P25M Income Tax ([P150M – 50M) *25%]
6. The share of AC and SMC in the net income of the joint venture shall be based on the distributable income, after tax,
that is, P75,000,000 (P100M taxable income less P25M tax), or P37.5M each.
7. The share of AC and SMC from the income of the TAXABLE joint venture shall be treated as inter-corporate dividends,
and is therefore exempt from income tax and final tax (see discussion of Final Tax under Tax on Corporations).
Accordingly, it is not included in their separate taxable income, as computed below:

Asia Construction San Miguel Construction

Gross Income P20,000,000 P30,000,000
Share in the exempt Joint Venture - -
Expenses (5,000,000) (10,000,000)
Taxable Income 15,000,000 20,000,000

8. In the case however of individual co-venturers, the share in the net income of a taxable joint venture shall be subject
to a 10% final tax, similar to that of dividends received by partners in a taxable partnership.

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B. PARNTERSHIPS/JOINT VENTURES SUBJECT TO INCOME TAX

All other partnerships, except those mentioned above (item A), no matter how created or organized, are considered
corporations subject to corporate income tax.

TAXABLE PARTNERSHIPS: for tax purposes, taxable partnerships are taxed, in all respects, similar to a corporation.
Accordingly, it may claim itemized and optional standard deductions subject to the same applicable rules for corporations.
They are also subject to the rules on Final Tax, Capital Gains Tax and Minimum Corporate Income Tax. (see discussion
under Tax on Corporations)

Filings of Tax Return

Taxable partnerships, like ordinary corporations, are required to file quarterly income tax returns for the first, second, and
third quarters, and an annual return based on their accounting periods.

Computation of Distributive Share in the net income of a GP (Taxable Partnership)

Gross income Subject to final withholding tax on dividend xxx

income.
Allowable deductions (xxx)
Net income Total Distributive Share of a Partner. The xxx
Less: Corporate tax partner’s share is treated as dividend (xxx)
income from a domestic corporation, hence,
Net income after corporate tax subject to final withholding tax on dividend xxx
Other tax exempt income income. xxx
Income subject to final taxes (net) xxx
DISTRIBUTABLE INCOME of the partnership Xxx
x P/L ratio of a partner %
DISTRIBUTIVE SHARE OF A PARTNER xxx*

*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.

Note:
 A General Partnership is subject to RCIT or MCIT, whichever is higher.

Sample Computation of a Partner’s Distributive Share in the Net Income of a General Partnership
Income from Passive income net of Capital gain net of CGTs Total
Operations FWTx
Gross income -GP X
Allowable Deductions (x)
Net income – GP X
25% RCIT* (x)
Net income after tax Px Px Px X**
X Partner’s P&L % % % %
Share in income X X X X***

*A General Partnership is subject to RCIT or MCIT, whichever is higher.

**Total Distributable Income of the GPP
***Total Distributive 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) X
Gross business income X
Allowable deductions from gross business income (x)
Share in the net income of the GP 0=Not applicable, subject to Final Withholding Tax
Partner’s Taxable Net Income Xxx

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 Tax Liability of Partners in a Taxable Partnership

Partner Final Tax Rate Tax Base

Citizen or Resident Alien 10% Dividend or Share in the distributable after tax net
income of the partnership
NRAETB 20% Dividend or Share in the distributable after tax net
income of the partnership
NRANETB 25% Dividend or Share in the distributable after tax net
income of the partnership

Note: The share of an individual in the net income after tax of an association, a joint account, or a joint venture
or consortium taxable as a corporation, of which he is a member or co-venturer, is also subject to this final tax.

Tax Liability of Corporate Co-Venturers in a Taxable Joint Venture (JV)

Co-Venturer Final Tax Rate Tax Base

DC Exempt Dividend or Share in the distributable after tax
net income of the JV
RFC Exempt Dividend or Share in the distributable after tax
net income of the JV
NRFC 15% FWT* Tax Dividend or Share in the distributable after tax
Sparing net income of the JV

25% FWT  No Tax

Sparing

Tax Liability of Individual Co-Venturers in a Taxable Joint Venture (JV)

Venturer Final Tax Rate Tax Base

Citizen or Resident Alien 10% Dividend or Share in the distributable after tax
net income of the JV
NRAETB 20% Dividend or Share in the distributable after tax
net income of the JV
NRANETB 25% Dividend or Share in the distributable after tax
net income of the JV

Illustration of Taxable Partnership

A business partnership organized by partners Tom and Jerry, equal partners, has the following data for the calendar year
ended 20x6:

Gross business income P1,000,000

Deductible expenses 300,000
Yield from deposit substitutes 62,500
Withdrawals on the share in the net income of the partners, net of withholding tax 150,000
Rent income 300,000
Quarterly payments of income tax 120,000

NOTE:
1. Taxable income, Income Tax and Distributable Income is computed as follows:

Gross business income P1,000,000

Deductible expenses (300,000)
Rent income 300,000
Taxable Income 1,000,000
Income Tax (25%) (250,000)
Distributable Income 750,000

2. The Income Tax of P250,000 is 25% of the taxable income (P1,000,000), the regular corporate income tax rate.
3. Distributable Income will be the net income (taxable income), after tax.
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4. The distributable income shall be distributed to the partners based on their profit sharing agreement. Here, Tom and
Jerry will each get P375,000 as their share in the income of the partnership.
5. The share in the net income of the taxable partnership shall be subject to a final tax of 10%, similar to dividends.
(see Final Tax under Tax on Individuals) Thus, the share of a partner in the net income of a taxable partnership is no
longer included in the computation of the individual income tax of the partner.
6. Accordingly, Tom and Jerry would each receive cash of P337,500, their share in the profit of the partnership
(P375,000) less 10% final tax (P37,500) which is remitted by the partnership to the BIR; if the partner is a non-
resident alien engaged in trade or business in the Philippines, it is subject to 20% final tax.

Since the partnership is taxed similar to a corporation, the share of the partners from its income is treated similar to
dividends.

7. The withdrawals of the partners would not affect the amount of distributable income, ONLY the CASH remittance.
8. A share in the profit of a partnership is deemed received by the partner even if no ACTUAL payment was made, under
the principle of constructive receipt.

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CO-OWNERSHIP

For income tax purposes, co-ownership may arise in the following cases:

1. When two or more heirs or beneficiaries inherit an undivided property from a decedent; or
2. When a donor makes a gift of an undivided property in favor of two or more donees.

A. When Co-ownership is Not Subject to Income Tax

Generally, the activities of the co-owners are usually limited to the preservation of the co-ownership
property and the collection of the income therefrom. In such a case, the co-ownership, as such entity, is
not subject to income tax.

Tax Liability of Co-owners in Exempt Co-ownership

The co-owners in an exempt co-ownership shall be liable for income tax only in their separate and individual
capacities. The co-owners shall report and include in their respective personal income tax returns their
shares of the net income of the co-ownership.

B. When Co-ownership is Subject to Income Tax

1. When a co-ownership is formed or established voluntarily, or upon agreement of the parties, what was
likely constituted is a business partnership.

OR

2. When the income of the co-ownership is invested by the co-owners in business or other income-
producing properties, the co-owners if effect constituted themselves into a business partnership.

In either case, the co-ownership will subject to income tax as a corporation.

Note:

There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. (Art. 484,
Civil Code)

Taxability: Co-ownerships are generally not taxable because the activities of the co-owners are usually limited to the
preservation of the property owned in common and collection of the income therefrom.

The income of the property owned in common is divided among the co-owners who shall then report in their respective
income tax returns their shares of the income of the co-ownership.

When treated as a partnership: there must be unmistakeable intention to form a partnership.

The mere sharing of gross returns does not in itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from the returns are divided. (Art. 1769[3], Civil Code)

However, when the income of the co-ownership is invested by the co-owners in business or other income producing
properties, the co-ownership becomes taxable as a corporation because the co-owners have constituted a partnership.

Property should be considered as owned by an unregistered partnership property

1. Inherited property remained undivided for more than 10 years and no attempt was ever made to divide the
same among the co-heirs;
2. Nor was the property under administration proceedings nor held in trust.

REVIEW QUESTIONS

Problem 1: (Partnership) X and Y formed a partnership with profit and loss sharing of 60% and 40%, respectively.

The summary of the partnership’s statement of income and expenses during the year are as follows:
Net income from operation P1,400,000

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 Other income 200,000
Interest income from bank deposit, net of 20% of final tax 80,000

Required:
1. If the partnership is a general professional partnership, how much is the income tax due and payable per ITR of the
partnership?
2. If the partnership is a general professional partnership, how much is the income tax still due and payable of partners
X and Y per ITR, assuming that the creditable withholding tax has been withheld and remitted to the BIR?
3. If the partnership is a commercial partnership, how much is the income tax due and payable per ITR of the
partnership?
4. If the partnership is a commercial partnership, how much is the final taxes on the respective profit share of partner X
and partner Y?

1. 0
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)

2.
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

Net taxable income P960,000 P640,000

Income tax due 178,000 90,000
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 P34,000 P 26,000

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)

3.
Total partnership net income not subjected
to final taxes P1,600,000
Multiplied by corporate normal tax rate 25%
Income tax due P 400,000

4.
Total partnership net income after tax
(P1,600,000 – P400,000) P1,200,000
Add: Interest income, net of 20% final tax 80,000
Net income for distribution P1,280,000

Partner X Partner Y
Partner X (P1,280,000 x 60%) P768,000
Partner Y (P1,280,000 x 40%) P512,000
Multiplied by final tax on dividend 10% 10%
Final taxes on share of each partner P 76,800 P 51,200

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.

Note: The dividend income received by a partnership is exempt from income tax.

Problem 2: (Joint Venture) X Co. and Y Co., both domestic corporations, form a joint venture to construct a building
with a contract price including 12% VAT amounting to P112,000,000. The total cost of construction amounted to
P72,800,000 including 12% VAT. Operating expenses related to the joint venture amounted to P15,000,000. The

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corporations agreed to share any income or losses equally.

Required: Compute the related taxes of the joint venture and the joint venture partners assuming that the construction is
1. Not government project
2. A government project

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 25%
Income tax due P 5,000,000

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 25% 25%
Income tax due P 2,500,000 P 2,500,000

Problem 3: Co-ownership (Preservation of the property) A and B are co-owners by virtue of a property given to
them by their father.

The co-ownership had a gross rental income of P500,000 and expenses related to rental activity of P300,000 but 10% is
non-deductible for the year 20X1.

A and B share in the profits at 75% and 25%, respectively. A withdrew P50,000 from the co-ownership net income for the
year, B did not withdraw any amount. A and B are both single.

Required:
1. The income tax liability of the co-ownership
2. The taxable income of A

Answer
1. 0

2. Rent income 500,000

Deductible expenses(300Kx90%) (270,000)
Net income 230,000
75%

Taxable income 172,500

Problem 4: Co-ownership (Taxable as a Corporation) In 1989, Kathy Ann Sabado and Grace Lingo received a
plantation from their aunt, Katrina Halili. The cousins continued to maintain the plantation.
 In 2020, the net income of the plantation is P5,000,000.
 P1,000,000 was received by Grace before deducting the applicable withholding tax

Required:
1. What is the amount of income tax due and payable of the ownership?
2. What is the amount of the final income tax withheld from the share of Grace?
3. What is the amount of the income tax still due and payable of Grace per ITR?

answer
1. That the co-ownership shall be taxed as a corporation if the property was not divided for more than ten (10)

P a g e | 15
 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 25%
Income tax as corporation P1,250,000

2. Final tax on dividend of Grace:

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. The amount received shall no longer be reported in the ITR since it has been subjected to final tax on dividend.

Problem 5: (8% income tax rate) Toto had the following data in 20x8:
Professional partnership
Gross income P500,000
Operating expenses 200,000
Interest in the professional partnership 60%

Sole proprietorship
Gross receipts P800,000
Cost of services 220,000
Operating expenses 190,000
Capital gain on sale of personal car 150,000
Capital gain on Domestic shares not listed thru PSE 200,000

Required: How much is the income tax due if the partnership availed of the optional standard deduction while Toto opted
for the 8% income tax rate?

Partnership income
Gross income 500,000
Less: OSD (500,000 x 40%) (200,000)
Net inocme 300,000 Graduated
Share of partner 60% Tax Table
Taxable income 180,000

Tax on P180,000 Exempt

Sole proprietorship
Gross receitps 800,000
Capital gain 150,000
Total 950,000
Rate of tax 8% 76,000
Total 76,000

Determination of the Optional Standard Deduction for General Professional Partnership (GPPSs) and
Partners of GPPs
GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners
shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the
net income of the GPP.

The GPP 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. Section 26 of the Tax Code, as amended, likewise provides
that- “For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in
the same manner as a corporation.” As such, a GPP may claim either the itemized deductions allowed under Section 34
of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an
amount not exceeding forty percent (40%) of its gross income.

In computing taxable income defined under Section 31 of the Tax code, as amended, the following may be allowed as
deductions:
a. itemized expenses which are ordinary and necessary, incurred or paid for the practice of Profession; OR
b. Optional Standard Deduction (OSD).

P a g e | 16
 The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD. The
share in the net income of the partnership, actually or constructively received, shall be reported as taxable income of
each partner. The partners comprising the GPP can no longer claim further deduction from their distributive share in
the net income of the GPP and are not allowed to avail of the 8% income tax rate option since their
distributive share from the GPP is already net of cost and expenses.

If the partner also derives other 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 income would either be
OSD or itemized deductions.

Problem 6: (Itemized vs. OSD) AB Partnership is a GPP, with A, married and B, Single, participating equally in the
income and expenses. The following are the data for the partnership and the partners in a calendar year:
AB Partnership A B
Net sales P2,000,000 P600,000 P800,000
Gross income 1,200,000 300,000 400,000
Operating expenses 700,000 140,000 240,000

A uses his personal car in going to meetings with client. He was able to determine that the allocated depreciation and
gasoline expense to such meetings is P70,000. The said amount was not included in the expenses claimed by the
partnership.

Required:
1. How much is distributive share of A in the partnership (AB Partnership use itemized deduction)?
2. How much is taxable income of A (assume Partner A – used itemized deduction)?
3. How much is taxable income of A if the partnership is engaged in trade or business?
4. Assuming AB Partnership is a GPP uses OSD:
A. How much is the taxable income of A (assume Partner A – used OSD)?
B. How much is the taxable income of A (assume Partner A-used itemized deduction)?

Answer
1. (P1,200,000 – 700,000) x 50% = P250,000

2. (300,000 +250,000 – 140,000 - *70,000-) = P340,000

(Allowed to deduct- under itemized)

3. (300,000 – 140,000) = P160,000

4. (If Partner A – use OSD)

Net sales 600,000
OSD-40% (240,000)
Profit sharing
1,200,000
OSD-40% (480,000)
720,000
x 50% 360,000

Taxable income 720,000

(If Partner A – use Itemized deduction)Cannot deduct reimburse (Partnership OSD)

Gross income P300,000
OPEX (140,000)
Profit sharing 360,000
Taxable income P520,000

Problem 7: Mr. JMLH is a partner of AMBS & Co., a general professional partnership (used OSD), and owns 25% interest.
The gross receipts of AMBS & Co. amounted to P10,000,000 for taxable year 20x8. The recorded cost of service and
operating expenses of AMBS & Co. were P2,750,000 and P1,500,000, respectively.

P a g e | 17
Required: Compute income tax payable.

Determination of the Optional Standard Deduction for General Professional Partnership (GPPSs) and Partners
of GPPs
GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners shall
be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net
income of the GPP.

The GPP 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. Section 26 of the Tax Code, as amended, likewise provides that- “For
purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same
manner as a corporation.” As such, a GPP may claim either the itemized deductions allowed under Section 34 of the Code
or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not
exceeding forty percent (40%) of its gross income.

In computing taxable income defined under Section 31 of the Tax code, as amended, the following may be allowed as
deductions:
a. itemized expenses which are ordinary and necessary, incurred or paid for the practice of Profession; OR
b. Optional Standard Deduction (OSD).

The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD. The
share in the net income of the partnership, actually or constructively received, shall be reported as taxable income of each
partner. The partners comprising the GPP can no longer claim further deduction from their distributive share in the net
income of the GPP and are not allowed to avail of the 8% income tax rate option since their distributive share
from the GPP is already net of cost and expenses.

If the partner also derives other 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 income would either be OSD or itemized
deductions.

Gross receipts 10,000,000 Share in distributive profit 1,087,500

Less: Cost of services (2,750,000) (4,350,000 x 25%)
Gross income 7,250,000 Tax Due:
OSD 40% (2,900,000) On P800,000 130,000
Net income for distribution 4,350,000 On excess
(1,087,500 - 800,000)x30% 86,250
Income tax due 216,250

Notes:
* There is no income tax liability for AMBS & Co. since it is a general professional partnership under Section 26 of the Tax
Code, as amended.
* The GPP elected OSD in the computation of its net income and its election is irrevocable for the taxable year for which
the return is made.
* The GPP is liable to business tax.

* Individual partner is not allowed to claim further deduction from his distributive share since this is already net of cost
and expenses.
* Taxpayer is not allowed to avail of the 8% income tax rate option since their distributive share from GPP is already net
of cost and expenses.

Problem 8: Ms. GEAL is a partner of CCF & Co., a general professional partnership (used itemized deductions), and owns
25% interest. The gross receipts of CCF & Co. amounted to P10,000,000 for taxable year 20x8. The recorded cost of
service and operating expenses of CCF & Co. were P2,750,000 and P1,500,000, respectively.

Required: Compute income tax payable.

P a g e | 18
 Gross receipts 10,000,000
Cost of services (2,750,000)
Gross income 7,250,000
Itemized deduction (1,500,000)
Net income for distribution to partners 5,750,000

Share in distributive profit (5,750,000 x 25%) 1,437,500

Tax Due:
On P800,000 130,000
On excess (1,437,500 - 800,000) x 30% 191,250
Basic tax due 321,250
Less: Ctax and quarterly payment
Tax still due 321,250

Note:
 There is no income tax liability for CCF & Co. being a general professional partnership under Section 26 of the Tax
Code, as amended.
 The GPP elected itemized deduction in the computation of its net income and its election is irrevocable for the taxable
year for which the return is made.
 The GPP is liable to business tax.
 Individual Partner is not allowed any deduction on his distributive share since this is already net of cost and expenses.
 Taxpayer is not allowed to avail of the 8% income tax rate option since her distributive share from GPP is already
net of cost and expenses.

DO IT YOURSELF

Problem 1: (Joint Ventures and Corporate Co-Venturers) ABC Company and DEF Company formed a joint venture.
They agreed to share profit and loss in the ratio of 70% and 30% respectively. The results of operations were provided
below:
Joint Venture ABC Co. DEF Co.
Gross income P50,000,000 P30,000,000 P20,000,000
Business expenses 30,000,000 20,000,000 15,000,000

Case A: Assume the above joint venture is a taxable joint venture, determine:
1. Taxable income of the joint venture
2. Income tax payable of the joint venture
3. Taxable income of ABC Company
4. Income tax payable of ABC Company
5. Taxable income DEF Company
6. Income tax payable of DEF Company

Case B: Assume the above joint venture is a tax-exempt joint venture, determine:
1. Taxable income of the joint venture
2. Income tax payable of the joint venture
3. Taxable income of ABC Company
4. Income tax payable of ABC Company
5. Taxable income DEF Company
6. Income tax payable of DEF Company

Case A (Taxable Joint Venture)

1 20,000,000
2 5,000,000
3 10,000,000
4 2,500,000
5 5,000,000
6 1,250,000

Joint Venture ABC Co. DEF Co.

Gross income 50,000,000 30,000,000 20,000,000
Business expenses (30,000,000) (20,000,000) (15,000,000)
Taxable income 20,000,000 10,000,000 5,000,000
Tax Rate (RC IT) 25% 25% 25%
Tax Due 5,000,000
P a g2,500,000
e | 19 1,250,000
 CAse B (Tax Exempt Joint Venture)
1 Nil, tax exempt
2 Nil, tax exempt
3 24,000,000
4 6,000,000
5 11,000,000
6 2,750,000

Joint Venture ABC Co. DEF Co.

Gross income 50,000,000 30,000,000 20,000,000
Share in the income of the Joint Venture 14,000,000 6,000,000
Business expenses (30,000,000) (20,000,000) (15,000,000)
Net Income(Joint Venture) /Taxable income-(ABC )(DEF) 20,000,000 24,000,000 11,000,000
Tax Rate (RC IT) - 25% 25%
Tax Due - 6,000,000 2,750,000

Problem 2: (Joint Ventures and Individual Co-venturers) Bonet and Ryan formed a joint venture. They agreed to
share profit or loss in the ratio of 70% and 30%, respectively. The results of operations were provided below:
Joint Venture Bonet Ryan
Gross income P50,000,000 P30,000,000 P20,000,000
Business expenses 30,000,000 20,000,000 15,000,000

Case A: Assuming the above joint venture is a taxable joint venture, determine the following:
1. Taxable income of the joint venture
2. Income tax payable of the joint venture
3. Taxable income of Bonet
4. Taxable income of Ryan
5. Final tax due of Bonet
6. Final tax due of Ryan

Case B: Assuming the above joint venture is a tax-exempt joint venture determine the following:
1. Taxable income of the joint venture
2. Income tax payable of the joint venture
3. Taxable income of Bonet
4. Taxable income of Ryan
5. Final tax due of Bonet
6. Final tax due of Ryan

P a g e | 20
 Case A
1 20,000,000
2 5,000,000
3 10,000,000
4 5,000,000
5 1,050,000
6 450,000

Joint Venture Bonet Ryan

Gross income 50,000,000 30,000,000 20,000,000
Business expenses (30,000,000) (20,000,000) (15,000,000)
Taxable income 20,000,000 10,000,000 5,000,000
Tax Rate (RC IT) @ 25% (5,000,000)
Distributable income 15,000,000

Share in inocme
Bonet @ 70% 10,500,000 x 10% 1,050,000
Ryan @ 30% 4,500,000 x 10% 450,000

Case B
1 Nil, tax exempt
2 Nil, tax exempt
3 24,000,000
4 11,000,000
5 Final tax due = P0; subject to basic and creditable withholding tax
6 Final tax due = P0; subject to basic and creditable withholding tax

Joint Venture Bonet Ryan

Gross income 50,000,000 30,000,000 20,000,000
Business expenses (30,000,000) (20,000,000) (15,000,000)
Net Income 20,000,000 10,000,000 5,000,000

Distributable income 20,000,000

Share in income (70%) (30%) 14,000,000 6,000,000

Taxable income 24,000,000 11,000,000

Problem 3: (Partnership) Aca, married, has two dependent minor brothers. He is a partner of a general professional
partnership. He is also engaged in trading business of his own. The following data were provided by Aca in 20x8:
Aca’s gross income from his trading business P1,000,000
Aca’s expenses from his trading business 600,000
Interest income, BDO – Manila 20,000
Share from the net income of a general professional partnership 400,000
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 Aca’s

P a g e | 21
 1 Income tax due of the partnership = P0(tax exempt)
2 Income tax due = P310,000

Gross income from his trading business 1,000,000

Expenses from his trading business (600,000)
Share from the net iocme of a GPP 400,000
Royalty, books published in USA 150,000
Salaries, gross of withholding tax 450,000
Taxable income 1,400,000

Tax Due (Train Law) P130,000 + (P600,000 x30%) 310,000

Problem 4: (Partnership) Data for 20x8 taxable year of Bit and Beta (BB) Partnership including the partners’ own
income are as follows:
BB Partnership Bit Beta
Gross income P2,000,000 P800,000 P1,000,000
Allowed deductions 1,200,000 400,000 500,000
Drawing accounts:
Bit 150,000 30,000 0
Beta 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 Bit
3. Tax due of Beta

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 Bit
3. Tax due of Beta

Case A (Ordinary Partnership)

1 200,000
2 30,000
3 55,000
BB Partnership Bit Beta
Gross income 2,000,000 800,000 1,000,000
Deduction (1,200,000) (400,000) (500,000)
Taxable income 800,000 400,000 500,000
Tax rate 25% Train Table Train Table
Tax due 200,000 30,000 55,000

Note: The partner's share in the net income of the partnership is treated as dividend income subject to a final tax rate of 10%

P a g e | 22
 Case B (General Professional Partnership)
1 Tax due of the partnershp = P0 exempt
2 Tax due of Bit = P110,000
3 Tax due of Beta = P184,000
BB Partnership Bit Beta
Gross income 2,000,000 800,000 1,000,000
Deduction (1,200,000) (400,000) (500,000)
Net Income 800,000 400,000 500,000
Share in partnership income 320,000 480,000
Taxable income 720,000 980,000
Tax rate Exempt Train Table Train Table
Tax due 0 110,000 184,000

Problem 5: (Partnership) Vic and France are partners in a commercial partnership. Their profit and loss ratios were
3:6. During 20x8, the following data were provided:
Data of the Partnership:
Gross profit from sale of service P3,500,000
Direct cost of services 1,500,000
Business expenses 700,000
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 expanded foreign currency deposit 50,000
system
Capital gain on sale of real property classified as capital asset located in Caloocan 300,000
City. Selling price – P2M; FMV – P2.5M; Cost P1.7M
Quarterly tax payments 75,000

Data of the Partners:

Dividend income from a resident foreign corporation earned by Vic P120,000
Dividend income from a domestic corporation earned by France 85,000
Royalty income from Philippines earned by France 35,000
Capital gain by France on sale of shares of stock of a domestic corporation 120,000
Selling price – P3,00,000; FMV – P300,000; Cost – P180,000
Gross income from a sole-proprietorship 925,000
Allowable deductions 670,000
Quarterly tax payments 12,500

Required: Determine the following:

1. Income tax payable of the Partnership
2. Income tax payable of Vic
3. Income tax payable of France
4. Final tax on passive income of the Partnership
5. Final tax on passive income of Vic
6. Final tax on passive income of France
7. Capital gains tax of the partnership
8. Capital gains tax of Vic
9. Capital gains tax of France

P a g e | 23
1 280,000
2 12,600
3 P0
4 11,500
5 43,200
6 101,900
7 150,000
8 P0
9 18,000

Partnership
Gross profit from sale of services 3,500,000
Direct cost of services (1,500,000)
Business expenses (700,000)
Rental income in business assets (gross)(142,500/95%) 150,000
Taxable income 1,450,000
x tax rate 25%
Tax due 362,500
Quarterly tax payments (75,000)
Withholding tax on rent (7,500)
Income tax payable 280,000

Interest inocme on peso bank deposit @ 20% 4,000

Interest income - FC DS @ 15% 7,500
Final tax on passive inocme of the partnership 11,500

Capital gains tax on real property (2.5M x 6%) 150,000

Distributable income

Taxable income 1,450,000

Total income subject to final final 70,000
C apital gain 300,000
Less:
Basic tax due (362,500)
Final tax due (11,500)
C apital gains tax (150,000)
Distributable income 1,296,000

Vic
Gross income from sole proprietorship business 925,000
Business expenses (670,000)
Dividend income - resident foreign corporation 120,500
Taxable income 375,500
Tax due (Train Table) 25,100
Quarterly tax payments (12,500)
Income tax payable 12,600

Final tax, share in partnership income (1,296,000 x 3/9 x 10%) 43,200

C apital gains tax - Vic 0

France
Income tax payable P0
(No Income subject to basic tax)

Dividend income @ 10% 8,500

Royalty income @ 20% 7,000
Share in partnership income (1,296,000 x 6/9) x 10% 86,400
Total final tax on passive income 101,900

C aptial gains tax on shares of stock

(P120,000 x 15%) 18,000

P a g e | 24
Problem 6: (Partnership) Louis and Francis are partners in the following partnership:
Business Partnership GPP
Gross income P800,000 P500,000
Deductible expenses 420,000 375,000

Personal income and expenses: Louis Francis

Gross income P325,000 P380,000
Deductible expenses 117,000 205,000
Dividend from domestic corporation 25,000 30,000
Dividend from foreign corporation 12,000 8,250
Prize, Single Contest 15,000 7,500
Royalty, books 10,000 18,000

Additional Information: Partners agreed to share partnership income and losses as follows: Louis 30% and Francis 70%.

Required: Determine the following:

1. Income tax payable of the business partnership
2. Income tax payable of the GPP
3. Taxable income of Louis
4. Taxable income of Francis

Note:
Results of contest is based on effort rather than chance - (Prize)
Results of raffle draw results is not based on effort but a chance - (Winning)

1 95,000
2 P0
3 257,500
4 278,250
Business Partnership GPP
Gross income 800,000 500,000
Deductions (420,000) (375,000)
Net Taxable income 380,000

Net income 125,000

Tax rate 25%

Income tax payable 95,000 Exempt

Luis Francis
Gross income 325,000 380,000
Deductible epxenses (117,000) (205,000)
Dividend from foreign corporation 12,000 8,250
Prize, Singing C ontest 7,500
Share in income of GPP 37,500 87,500
Taxable income 257,500 278,250

Problem 7: (Co-ownership)

Case 1: A, B and C bought a parcel of land for the purpose of improvement the same before leasing it out to interested
tenants.

Required: Is a co-ownership created?

Answer: No ( Through the property may be undivided, it was acquired by the owners not through gratuitous transfers
(inheritance or donation) but by purchase. A, B and C formed a partnership, instead of co-ownership. Partnership is
generally taxable as a corporation. Consequently, A, B and C shall be considered “shareholders” for income tax purposes.
Income tax of a partnership as well as the partners are discussed in next chapter.

P a g e | 25
Case 2: On January 1, 20x7, Noy, a resident citizen taxpayer died leaving an undivided parcel of land to his heirs A, B
and C valued at P60,000,000. The property is an income producing properly through rentals. In 20x8, the property
earned gross rentals amounting to P15,000,000 while expenditures necessary to carry out the operations was P3,000,000.

On the other hand, the heirs, who are all engaged in business in their own individual capacity, provided the following data
for 20x8 taxable year:
A B C
Gross business income P6,000,000 P5,000,000 P8,000,000
Business expenses 3,000,000 2,500,000 6,000,000
Income subject to final taxes (net) 200,000 320,000 500,000

Required:
1. Is a co-ownership created?
2. Assuming Noy was able to secure a partition and three separate land titles were issued by the government before his
death, naming his heirs as the rightful owners in his last will and testament, is a co-ownership created?
3. What is the applicable tax for the gratuitous transfer (inheritance) of the property from Noy to his heirs?
4. How much is the taxable income of the Co-ownership?
5. How much is the taxable income of A in 20x8?
6. How much is the income tax payable of A in 20x8?

1. Yes
 Since the property is undivided, the heirs are considered co-owners.
 The estate of Noy valued at P60,000,000 is not subject to income tax but to estate tax (transfer tax)

2. No
 The property involved is not an undivided property.

3. Estate tax

4. None
 A co-ownership is not a taxable person or entity. Its income, however, is distributed or shared by the
heirs/donees, thus, taxable to them in their individual capacity

5.

Gross income 6,000,000

Business expenses (3,000,000)
Share in net income of the co-ownership (P12M/3) 4,000,000
Taxable income 7,000,000

6. P2,090,000

P a g e | 26
 PREPARATION OF INCOME TAX RETURN

Use the following data for the next four (4) questions:

BM Partnership is a commercial partnership formed by Borromeo and Marquez. The results of operations for year 2021,
its 4th year of operations, were as follows:

Partnership
Gross sales P25,000,000
Cost of sales 10,000,000
Salary expense 3,800,000
Rent expense 1,650,000
Utilities expense 175,000
Depreciation expense 120,000
Miscellaneous expenses 48,000

Personal Income and Expenses of the partners:

Borromeo Marquez
Gross Income P3,250,000 P3,800,000
Deduction expenses 1,170,000 2,050,000
Dividend from domestic corporation 250,000 300,000
Dividend from foreign corporation 120,000 82,500
Prize 150,000 75.000
Royalty books 100,000 180,000

1. The share of the partners in the net income of the partnership is

A. Exempt from income
B. Subject to 10% final withholding tax
C. Subject to 10% creditable withholding tax
D. Subject to 15% creditable withholding tax

2. How much is the share of each partner in the net income of the partnership?
A. P0
B. P2,301,750
C. P3,452,625
D. P6,906,250

Gross sales 25,000,000

C ost of sales (10,000,000)
Gross income 15,000,000
Less: Operating expenses
Salary expense 3,800,000
Rent expense 1,650,000
Utilities expense 175,000
Depreciation expense 120,000
Miscellaneous expense 48,000 (5,793,000)
Net taxable income - GP 9,207,000

RC IT Due @ 25% 2,301,750

MC IT @ 1% 150,000

Income Tax Due (Higher) - GP 2,301,750

Net income of the partnership before tax 9,207,000

Less: Income tax due of the Partnership (2,301,750)
Net income of the GP after tax 6,905,250
Divide by: number of partners 2
Share of each partner in the net income fo the GP 3,452,625

P a g e | 27
3. How much is the income tax due of Borromeo for the year?
A. P64,000
B. P490,000
C. P500,000
D. P554,000

Borromeos Business Income:

Gorss income 3,250,000
Deductible expenses (1,175,000)
Dividend from foreign corporation 120,000
Dividend from domestic corporation 10% FWT
Prize 20% FWT
Royalty income 20% FWT
Share in the income of the GP 10% FWT
Taxable net income - Borromeo 2,195,000

Income Tax Due (Graduated Rate) 554,000

On 1st P2M income 490,000
In excess of P2M (P200,000 x 32%) 64,000

4. Determine the income tax due of the partnership and fill-up the applicable income tax return
A. P150,000
B. P300,000
C. P2,301,750
D. P2,762,100

Gross sales 25,000,000

C ost of sales (10,000,000)
Gross income 15,000,000
Less: Operating expenses
Salary expense 3,800,000
Rent expense 1,650,000
Utilities expense 175,000
Depreciation expense 120,000
Miscellaneous expense 48,000 (5,793,000)
Net taxable income - GP 9,207,000

RC IT Due @ 25% 2,301,750

MC IT @ 1% 150,000

Income Tax Due (Higher) - GP 2,301,750

P a g e | 28
P a g e | 29
P a g e | 30
P a g e | 31
P a g e | 32
ABC Partnership is a general professional partnership formed by medical doctors. The result of operation for year 2021,
its fifth year of operations, were as follows:

Partnership
Gross receipts P30,000,000
Cost of services 18,000,000
Salaries expenses 5,800,000
Rent expense 2,500,000
Utilities expense 350,000
Depreciation expense 170,000
Transportation expenses 230,000
Miscellaneous expenses 90,000

Determine the income tax due of and fill-up the appropriate income tax return
A. P0
B. P572,000
C. P715,000
D. P658,000

A general professional partnership is exempt from income tax on its ordinary income.

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 DISCUSSION QUESTIONS/PROBLEMS
1. General Professional Partnership. Farrah, a senior auditor of Sycip, Gorrez, Velayo and Company registered
from her job recently. She invited Gina and Hannah, her former students in a exclusive school in Manila, who are
now certified public accountants, to join the accounting firm that she is planning to organize.

The following month, a partnership named “Farrah, Gina, Hannah and Company, CPAs”
was formally established.

During the year, the partnership had a gross income of P250,000.

a. What kind of partnership has been formed?
b. Is the partnership subject to income tax?
c. Is the partnership required to file an income tax return?
d. How about the partners?

a. The partnership formed is a general professional partnership because the objective of the partners is to exercise
a common profession.

b. No, a general professional partnership is not subject to income tax.

c. Yes. Although not subject to income tax a general professional partnership is required to file an income tax
return for the purpose of furnishing information to the BIR the amount that each partner will receive from the net
income of the partnership.

d. The partners are required to file an income tax return; they are taxable on their respective share in the net
income of the partnership.

2. Business partnership. Carmina and Carina contributed cash of P10,000 and P30,000, respectively, to open a
goto eatery along Recto Avenue, Manila. They invited Caress, a person with sufficient experience in this line of
business, to manage the affairs of the partnership.

The partners have agreed to share profits and losses in the ratio 20:40:40 for Carmina,
Carina and Caress?

During the year, the partnership earned a net income of P750,000.

a. What kind of partnership by Carmina, Carina and Caress?
b. Is it subject to income tax? How much?
c. How about the share of the partners in the partnership?

a. They formed a business partnership because the partners have contributed money and industry for the
purpose of dividing the profit among themselves.

b. A business partnership is considered as a corporation subject to corporate tax.

c. The share of the partners in the partnership are subject to a final tax of 10%./20%

3. Inherited property extrajudicially partitioned. Mr. Sumalangit died intestate in 2012, leaving his spouse and
five children as the only heirs. The estate consisted of a family home and a four-door apartment, which was being
rented to tenants. Within the year, an extrajudicial settlement of the estate was executed among the heirs, each
of them receiving his/her due share. The surviving spouse assumed administration of the property. Each year the
net income from the rental property was distributed to all proportionately, on which they paid, respectively the
corresponding income tax.

In 2017, the income tax returns of the heirs were examined and deficiency income tax
assessments were issued against each of them for the years 2014 to 2016, inclusive, as having
entered into an unregistered partnership. Were the assessments justified?

The assessments were justified. It is clear that they formed a general co-partnership when their respective share in the
extrajudicially partitioned property was entrusted to their mother for administration and the income therefrom having
been distributed to them proportionately.

4. Transactions between a partner and the partnership. Xavier has a 30% interest in the capital, profits and
losses of the XYZ Partnership. Yale (Xavier’s son) also has 20% interest in the capital, profits and losses. The

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 remaining 50% interest is owned by an individual unrelated to either Xavier or Yale. Xavier sells to the
partnership a machine having a cost to him of P50,000 and with a fair market value and selling price of P55,000.

a. What is the amount and character of Xavier’s recognized gain or loss on the sale of the machine?
b. What gain or loss would be recognized by the partnership if it sells the machine for P65,000?

a. Xavier’s ordinary gain on the sale of the machine is P5,000 (55,000– 50,000).

b. If the partnership sells the machine for P65,000, it has to recognize a gain of P10,000 (P65,000 – 55,000).

5. Reporting Income by partner. Rita is an employee of RST Partnership, a general co-partnership, and is paid a
salary of P7,000 per month for the period from January 1 to May 31 of the current year. On June 1, she was
admitted to the partnership and received P65,000 as share in the income of the partnership. What amount of
income is to be reported by Rita in her income tax return?

Rita should report P35,000 in her income tax return representing her salary for five (5) months (January to May) when
she was still an employee of the partnership.

Her share in the net income of P65,000 as partner in the partnership is not returnable because it is subject to final tax of
10%.

6. Co-ownership. Sister Evelyn and Rosalie inherited five (5) hectares of coconut land from their parents with a
fair market value of P150,000. Their plan is to build their residence but because of high cost of materials and
labor, the plan did not immediately materialize. After a year, the property unexpectedly yielded a profit of
P50,000.

a. Is the profit taxable to the co-ownership?

b. If the abandon their original plan of building their residence in that land and instead sell the parcel for
P200,000, is the gain to be derived from the sale taxable or not?
c. Assuming that the sisters have sufficient capital. So they invested additional capital, subdivided the land into
lots, introduced developments and begin to sell them. Are the profits on the series of transactions entered
into by the sisters subject to tax?

a. No, because a co-ownership is exempt from income tax.

b. The sale of the coconut land is not taxable to the co-ownership because it is exempt from tax. However, the
respective share in the P50,000 shall be taxable to the co-owners considering that they are taxable on their
share in the income of the co-ownership.

c. Yes. By subdividing the lot, introducing developments and entering into series of transactions, the co-ownership
has been converted into a partnership, subject to corporate income tax.

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