Chapter 6:

INCOME TAX
ON
PARTNERHIP
PRESENTATION BY GROUP 6
LEARNING OBJECTIVES
After studying this module, the learners should be able to:

Understand the concept of income taxation for

partnership.

Analyze situations with regards to the

computation of income taxes for
partnership.
PARTNESHIP Defined:
A partnership is defined as a contract
whereby two or more persons bind
themselves to contribute money,
property or industry to a common
fund to engage in profitable activities
with the intention of dividing the
profits among themselves.

Two or more persons may also form a

partnership for the exercise of profession
(Art. 1767 of the civil code)
 01

Kinds of
Partnership
for Tax
Purposes
General Professional Partnership
(GPP)
A partnership formed by persons for the
purpose of exercising their common
profession, no part of income of which is
derived from engaging in trade or
businesses.

Under Section 26 of the Tax Code and

pertinent revenue regulations, a GPP is not
subject to income tax and consequently to
creditable withholding tax.
General Professional Partnership
(GPP)
However, a GPP is required to file income tax
return for the purpose of furnishing
information as to the share of each partner
in the net income of the partnership which
each partner shall include in his individual
tax return.

For this purpose, the net income of a GPP

shall be computed in the same manner as a
corporation.
General Professional Partnership
(GPP)
Partners shall be liable for income tax only
on their separate and individual capacities.

Each partner shall report as gross income

his or her distributive share (actual or
constructive) in the net income of the
partnership.
General Professional Partnership
(GPP)
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
PHP 720,000, otherwise, 10% (RR 11-2018;
TRAIN Law).
Sample Computation of a Partner’s Distributive Share in the net income of a
GPP:

Income from Passive incomes net of Capital gains net of

FWTx CGTs
TOTAL
Operations

Gross Income-GPP 1,000,000

Allowable deductions (400,000)

Net Income-GPP 600,000 80,000 20,000 700,000*

X Partner’s P&L % 50% 50% 50%

Share in Income 300,000 *** 40,000 10,000 350,000**

* 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) 800,000

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 and CGT.
General Partnership
(Commercial Parnership)

Partnerships (other than general

professional partnerships, whether
registered or not, for income taxation
purposes, are considered as corporations
and re therefore taxed as such.

Partners are considered shareholders, and

therefore, profits distributed to them are
considered as dividends subject to final
withholding tax.
General Partnership
(Commercial Parnership)

Being final tax, the share of a partner in the

net income of the partnership subject to tax
is not returnable in the partner's personal
income tax return.

Distributive Share is equal to each partner's

distibutive share of the net income declared
by the partnership for a taxable year net of
tax.
Sample Computation of a Partner’s Distributive Share in the Net Income of a GP:
Sample Computation of a Partner’s Distributive Share in the Net Income of a
GP:

Passive Incomes net of

  Income from Operations Capital Gains net of CGTx TOTAL
FWTx

Gross Income-GP 1,000,000      

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% 50%

Share in Income 210,000 40,000 10,000 260,000

 Sample 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

 Illustrative Problem
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 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)
 Illustrative Problem

DBO De Leon Bobadilla Ocampo

Gross Income P5,000,000 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)

Question 1: How much is the taxable income of the Partnership?

Answer: P0
 Illustrative Problem

DBO De Leon Bobadilla Ocampo

Gross Income P5,000,000 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)

Question 2: How much is the distributive share of each partner in the income of the GPP?
Answer: P700,000
 Illustrative Problem

DBO De Leon Bobadilla Ocampo

Gross Income P5,000,000 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)

Question 3: How much is the taxable income of De Leon in 2018?

Answer: P2,800,000
 Illustrative Problem

DBO De Leon Bobadilla Ocampo

Gross Income P5,000,000 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)

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
 Illustrative Problem

DBO De Leon Bobadilla Ocampo

Gross Income P5,000,000 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)

Question 5: Using the same assumption in Question #4, how much is the taxable
income of Ocampo in 2018?
Answer: P1,975,000
 Illustrative Problem

DBO De Leon Bobadilla Ocampo

Gross Income P5,000,000 P3,500,000 P2,000,000 P2,800,000

Expenses 3,500,00 1,200,000 600,000 825,000

Income subject
to final taxes 600,000 200,000 200,000 200,000
(net)

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: P55,000
 Illustrative Problem
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 550,000
x FW Tax rate on dividend income 10%
Final withholding tax of each partner P55,000
Allowable Deductions to General
Professional Partnerships (GPP)

RR 8-2018 (Revenue
Regulations No.8 2018)

a 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.
Allowable Deductions to General
Professional Partnerships (GPP)

Section 26 of the Tax Code

“for purposes of computing the distributive share of
the partners, the net income of a GPP shall be
computed in the same manner as a corporation”

a GPP may claim either the itemized deductions

allowed under Section 34 of the Tax Code or in lieu
thereof, it can opt to avail of the optional standard
deduction (OSD) allowed to corporations in claiming
the deductions in an amount not exceeding forty
percent (40%) of its gross income.
Allowable Deductions from Gross
Income in computing the taxable
income of a GPP:

Itemized Deductions - specific expenses

Optional Standard Deduction -

standard rate of 40%
Allowable Deductions to General
Professional Partnerships (GPP)

Itemized Deductions

Specific expenses or other items deductible

from gross income

Itemized expenses which are ordinary and

necessary, incurred or paid for the practice
of profession
 Deductions from Gross Income
under Section 34 of the Tax Code
(as stated in Chapter 10)
Ordinary and necessary trade, business of professional
expenses

Taxes

Interest

Losses

Bad debts

Depreciation
 Deductions from Gross Income
under Section 34 of the Tax Code
(as stated in Chapter 10)
Depletion of Oil and Gas, Wells and Mines

Charitable and other contributions

Research and Development

Pension trusts

Additional requirements for deductibility of certain

payments
Optional Standard Deduction
Premium payments on health and/or hospitalization insurance of
an individual taxpayer
Allowable Deductions to General
Professional Partnerships (GPP)

Optional Standard Deduction

Optional deduction of 40% of gross income

in lieu of the itemized expenses

General rule in choosing between Itemized Deduction or OSD:

If expenses > 40% of gross income, itemized deduction is better.
If expenses ≤ 40% of gross income, OSD is better.
Allowable Deductions to the
Partners comprising General
Professional Partnerships
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.
Allowable Deductions to the
Partners comprising General
Professional Partnerships
Revenue Regulations 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 8% income tax rate option
since their distributive share from GPP is
already net costs and expenses.
Allowable Deductions to the
Partners comprising General
Professional Partnerships
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 (
Optional Standard Deduction.
 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 Bodabilla

Gross Income ₱ 600,000 ₱ 350,000 ₱ 400,000

Operating Expenses ₱ 350,000 ₱ 140,000 ₱ 220,000

 CASE A : ITEMIZED DEDUCTIONS

Q1. Assuming the partnership is a GPP, how much is the distributive share of
Trinidad in the income of the partnership?

Solution:
GPP’s Gross Income ₱ 600,000
Operating Expenses (350,000)
GPP’s Distributive Income ₱ 250,000
x Trinidad’s P & L% ( 50%
Share in the Net Income of the GPP ₱ 125,000

Answer: Trinidad has a distributive share of ₱ 125,000 in the income of the

partnership.
 CASE A : ITEMIZED DEDUCTIONS

Q2. How much is the taxable income of Trinidad?

Solution:
Gross Income - Trinidad ₱ 350,000
Operating Expenses (140,000)
Net Income - Trinidad ₱ 210,000
Share in the Net Income of the GPP - Trin 125,000
Total Taxable Income of Trinidad ₱ 335,000
 CASE A : ITEMIZED DEDUCTIONS

Q3. Assuming the partnership is a general partnership, how much is

the taxable income of Trinidad?

Solution:
Gross Income - Trinidad ₱ 350,000
Operating Expenses (140,000)
Taxable Net Income ₱ 210,000
 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.

Question 1: How much is the distributive share of Trinidad in the income of the
partnership assuming the latter is a GPP?

GPP's Gross income 600,000

OPEX (P600,000 x 40%) (240,000)
GPP's Distributable income 360,000
x P&L % 50%
Share in the net income of the GPP 180,000
 CASE B:Optional Standard Deductions (OSD)

Question 2: How much is taxable income of Trinidad?

Gross income-Trinidad 350,000

OPEX (140,000)
Net income 210,000
Share in GPP's income 180,000
Total Taxable income of Trinidad 390,000
 CASE B:Optional Standard Deductions (OSD)

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?

Gross Sales-Trinidad 550,000

OPEX (550,000x 40%) (220,000)
Net income 330,000
Add: Share in GPP's income 180,000
Total Taxable income of Trinidad 510,000
 CASE B:Optional Standard Deductions (OSD)

Question 4: Assuming the partnership is a general partnership, how

much is taxable income of Trinidad?

Gross income-Trinidad 350,000

OPEX (140,000)
Taxable net income - Trinidad 210,000