INCOME

TAXATION
UNDER THE TRAIN
LAW

Jesrelle Vhon G. Habana, CPA, MBA

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CHAPTER 4
Tax on Partnerships
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FOR INCOME TAX PURPOSES, THERE ARE
TWO KINDS OF PARTNERSHIPS, NAMELY:

(a) General professional

partnerships; and
(b) Other partnerships.

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GENERAL PROFESSIONAL
PARTNERSHIP OR (GPP)
-is a partnership formed for the
purpose of practicing a common
profession, no part of the net income of
which is derived from engaging in any
trade or business (Statutory definition).

The three elements are:

(a) The partners have a common
profession;
(b) The purpose is to practice the
common profession;
(c) No part of the net income is
derived from engaging in any trade or
business. 4
 NOTE

Other Partnerships not a

GPP are taxed like a
corporation.
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 • C and D, both lawyers, can form a general
professional partnership to practice law.
• A and B, both Certified Public Accountants,
can form a general professional partnership to
go into public accounting.
• Mr. E, a lawyer, and Mr. F, a Certified Public
Accountant, cannot go into the practice of
ILLUSTRATIONS taxation as a general professional partnership.
They do not have a common profession even
as they have a common field of practice.
• Mr. G, an architect, and Mr. H, an engineer,
cannot form a partnership that will qualify as a
general professional partnership because they
do not have a common profession.
• I and J, both Certified Public Accountants, in
partnership selling business machines, are not
in a general professional partnership. Their joint
activity is business, not the practice of a
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common profession.
GENERAL PROFESSIONAL
PARTNERSHIP
A general professional partnership is not
subject to income tax, but the individuals who
compose it are taxable on their shares in the
partnership net income, whether distributed or
not (called "distributable" [also called
"constructively received"]) to the partner from
partnership.

In arriving at the net income of the

general professional partnership, the rules
on gross income and deductions of
corporations shall apply. The partnership
may deduct from its gross income either:
(a) The Itemized Deductions for costs,
expenses and losses; or
(b) The Optional Standard Deduction, at
40% of its gross income.
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A general professional partnership and the partners comprising such
partnership may avail of the optional standard deduction only once, either
by the general professional partnership or the partners comprising the
partnership. Thus:
ILLUSTRATION:

From assumed data for a AB general professional partnership:

Gross income of the general professional partnership P 400,000

Case 1. If the general professional partnership Less: Optional Standard Deduction

takes the Optional Standard Deduction on its gross
*Since
income (at the
40% ofpartnership
its gross income),availed
the partnersof (40% of gross income of P400,000) P 160,000

Distributable net income (income is not subject

the Optional
should Standard
take the Itemized DeductionsDeduction,
for costs,
expenses and losses on their personal incomes. income tax) P240,000
the partner must take the
Case 2. If the general professional partnership For Partner A:
Itemized
takes Deductions.
the Itemized Deductions for costs, expenses
Share in partnership distributable net income at
and losses on its gross income, the partners should
take the Optional Standard Deduction (at 40% of (1/2 of P240,000) P 120,000
gross
For sales or grossB,
Partner receipts)
the on their personalmust
deductions Own gross income 600,000
incomes. NOTE:
also be Itemized Less: Own costs, expenses and losses
The Optional Standard Deduction for:
Deductions for costs and (itemized deductions)* 240,000 360,000
The partnership, is at 40% of its GROSS INCOME;
expenses. Taxable Income P 480,000
The partner, is at 40% of his own GROSS SALES OR 8
GROS RECEIPTS.
 THE QUARTERLY AND
YEAR-END RETURNS OF THE
TAXABLE
PARTNERSHIP.
A taxable partnership must file three
quarterly and an annual income tax returns in
which either the Optional Standard
Deduction or the Itemized Deductions for
expenses are consistently taken, and the
normal tax, or the minimum corporate
income tax, when applicable, is determined
and paid. But a partner does not report his
income from the partnership anymore
because it is to be considered as dividend,
which should have paid a final tax. 9
 General Professional
Partnership
(a) The general professional
partnership shall not be
subject to any income tax;
COMPARATIVE
RULES ON
PARTNERSHIPS (b) The partners shall be liable
for income tax only in their
separate or individual
capacities;
(c) For purposes of computing
the distributive shares of the
partners, the net income of
the partnership shall be
computed in the same
manner as that of a
corporation;
Other Partnerships
(a) The partnership is subject to the
rules on corporations (normal tax,
minimum corporate income tax,
final tax and capital gain tax). The
partnership shall file quarterly and
year-end income tax returns;
(b) In determining the net income of
the partnership, it may use either the
itemized deductions or the Optional
Standard Deduction;
(c) The taxable income of the
partnership, less the income tax
thereon, is the distributable net
income of the partnership;
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 General Professional Partnership
(d) In determining the distributable net
income of the partnership, such net
income may be arrived at by deducting
from its gross income either the Itemized
Deductions or the Optional Standard
COMPARATIVE Deduction. Optional Standard
Deduction is forty percent (40%) of
RULES ON the gross income of the partnership (just
like a corporation);
PARTNERSHIPS (e) Each partner shall report as gross
income his distributive share in the
partnership net income (in letter d)
above). to be consolidated with his
income (from other sources);
(f) If the partnership availed of the
Itemized Deductions, the partner shall
use the Optional Standard Deduction in
computing his taxable income If the
partnership availed of the Optional
Standard Deduction, the partner shall
use the Itemized Deductions in
computing his taxable income.
Other Partnerships
(d) The share of a partner in the
partnership's distributable net income of
a year, even if not actually received,
shall be considered constructively
received (as dividend) by the partner in
the same year that the net income of
the partnership is determined;
(e) A partner reports his own income
without the item of income considered
actually or constructively received from
the partnership.
(f) On his own income, the partner uses
either the Optional Standard Deduction
or Itemized Deduction, whatever
deduction the partnership used.
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THANK
YOU!
From the book of
Virgilio Reyes

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