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TAXATION OF

PARTNERSHIPS AND
PARTNERS
BY: BEMER JOHN ALVIN A. BACOSA
LEARNING OBJECTIVES:

Define partnership.
Identify the classification of partnerships.
Differentiate general professional partnership from general co-partnership.
Discuss the tax liability of a professional partnership.
Identify tax liability of partners in a general co-partnership.
CLASSIFICATION OF GENERAL
PARTNERSHIP IN TAXATION

1. General professional partnership. One formed by persons for the sole


purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
2. General co-partnership (compania colectiva). A general partnership
which is not a general professional partnership.
GPP REQUIREMENTS

GPP shall not be subject to the income tax but is required to file annual income
tax return / annual information return for the purpose of furnishing
information as to the items of gross income, deductions, and the names, TINs,
addresses and share of each partners. Partners in a general professional
partnership shall be liable for income tax in their separate and individual
capacities.
Division of Losses

Where the result of partnership operation is loss, the loss will be divided as
agreed upon by the partners. If there is no agreement as to division of losses
but there is as to profits, the losses shall be distributed according to the profit
sharing ratio. Such share in the losses may be taken up by the individual
partners in their respective income tax returns.
GENERAL PROFESSIONAL PARTNERSHIPS
(GPP)

Section 26 of the NIRC provides that For the purpose 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 allowed itemized deductions or the
optional standard deduction (OSD) allowed to corporations in claiming the
deductions in an amount not exceeding forty percent (40%) of its gross income.
Distributive Income and share

The net income determined by either claiming the itemized deduction or OSD
from the GPPs gross income is the distributable income from which the share
of each partner is to be determined. Each partner shall report as gross income
his distributive share, actually or constructively received, in the net income of
the partnership.
HOW TO COMPUTE TAXABLE INCOME?

In computing taxable income, all expenses which are ordinary and necessary,
incurred or paid for the practice of profession, are allowed as deductions.
Since the taxable income is in the hands of the partner, as a rule apart from the
expenses claimed by the GPP in determining its net income, the individual
partner can still claim deductions incurred or paid by him that contributed to
the earning of the income taxable to him.
Itemized Deductions or Optional Standard
Deductions for GPPs

Section 2 of Revenue Regulations 2-2010 amended Section 6 of Revenue


Regulations 16-2008 with regard to the determination of the optional
standard deduction for general professional partnerships (GPPs) and partners
of GPPs. The following rules shall govern the claim of the partners of
deductions from their share in the net income of the partnership:
RULE#1

If the GPP availed for the itemized deduction in computing its net income,
the partner is precluded from claiming the same expenses already claimed
by the GPP.
Hence, if the GPP availed of itemized deductions, the partners are not allowed to
claim the OSD from their share in the net income because the OSD is a proxy for
all the items of deductions allowed in arriving at taxable income.
It means that the OSD is in lieu of the items of deductions claimed by the GPP
and the items of deduction claimed by the partners.
RULE#2

If the GPP avails of OSD in computing its net income, the partners comprising
it can no longer claim further deduction from their share in the said net income
for the following reasons:
I. The partners distributive share in the GPP is treated as his gross income not his
gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated
to be deducted not from his gross income but from his gross sales/ receipts; and
II. The OSD being in lieu of the itemized deductions allowed in computing taxable
income as defined under Section 31 of the Tax Code, it will answer for both the items
of deduction allowed to the GPP and its partners.
RULE#3

Since one-layer of income tax is imposed on the income of the GPP and the
individual partners where the law had placed the statutory incidence of the tax
in the hands of the latter, the type of deduction chosen by the GPP must be
the same type of deduction that can be availed of the partners.
RULE#4

If the partner also derives other gross 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 gross income would follow the
same deduction that he can claim from his other gross income would follow
the same deduction availed of from his partnership income as a explained in
the foregoing rules. Provided, however, that if the GPP opts for the OSD, the
individual partner may still claim 40% of its gross income from trade, business
or practice of profession but not to include his share from the net income of
the GPP.
ILLUSTRATION: For the taxable year 2014, Noy and Nay, partners of a general professional
partnership agreed to divide profits and losses 50:50, respectively. Both are married without
qualified dependents. The following are the details of the account:
Sale of Services, GPP P2,500,000
Cost of Services, 875,000
Itemized Deductions, GPP 825,000
Partner Noy Partner Nay
Travelling Expenses (not liquidated by the GPP) P 34,500 P 16,500
Representation Expenses (personal credit card of Partner used) 14,250 23,500
Cost of Car, to be depreciated over 5 yrs. (used in practice, registered under
the Partner) 750,000 580,000
Salaries from the GPP 360,000 300,000
Lotto Winnings 900,000
Interest on Bank Deposits 25,000 20,000
Book Royalties 250,000
The distributable net income of the GPP, share of each partner and taxable income are
computed as follows:

GPP GPP
If OSD-- If itemized--
Sale of Services P2,500,000 P2,500,000
Less: Cost of Services 875,000 875,000
Gross Income P1,625,000 P1,625,000
Less: Deductions
40% Optional Standard Deduction or 650,000
Itemized Deductions 825,000
Distributable Net Income P975,000 P800,000

Share of each Partner (50:50) P487,500 P400,000


The distributable net income of the GPP, share of each partner and taxable income are
computed as follows:

GPP If OSD, then-- GPP If Itemized, then--


Noy Nay Noy Nay
Sale of Services P487,500 P487,500 P400,000 P400,000
Less: Additional Itemized Deductions
Travelling Expenses - - 34,500 16,500
Representation Expenses - - 14,250 23,500
Depreciation of Car - - 150,000 116,000
Net share of Each Partner in the GPP 487,500 487,500 201,250 244,000
Add: Salaries from the GPP 360,000 300,000 360,000 300,000
Total P847,500 P787,500 P561,250 P544,000
Less: Personal Exemptions 50,000 50,000 50,000 50,000
Taxable Income P797,500 P737,500 P511,250 P494,000
Creditable Withholding Taxes

Revenue Memorandum Circular 3-2012 was issued to clarify certain tax issues
involving GPPs. Under Sec. 2.57.5 (B)(4) of Revenue Regulation 2-1998, as
amended, income payments made to GPPs in consideration of its professional
services are exempt from creditable withholding taxes (CWT).
A GPP is not subject to income tax and, consequently, to CWT. It is the
individual partners who shall be subject to such taxes in their separate and
individual capacities.
GENERAL CO-PARTNERSHIPS

Partnerships (other than GPPs), whether registered or not, are considered as


corporations and are therefore taxed as corporations. Consequently, the
partners are considered as stockholders and, therefore, profits distributed to
them by the partnership are considered as stockholders and, therefore, profits
distributed to them by the partnership are considered as dividends, The share
of an individual partner in a taxable partnership is subject to final tax of 6% in
1998, 8% in 1999 and 10% in 2000.