Far Eastern University - Manila Income Taxation TAX1101 Partnership

FAR EASTERN UNIVERSITY - MANILA
INCOME TAXATION
TAX1101
Partnership
- a contract whereby two or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among themselves.
(General Partnership/ Commercial Partnership)
- Two or more persons may also form a partnership for the exercise of profession. (General
Professional Partnership) ( ART. 1767 of the Civil Code)
- it has a juridical personality separate and distinct from that of each of the parties.
Kinds of partnership
1. 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 business.
• 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.
• GPP is required to file income tax return for the purpose of furnishing information as to
the share of each partnership which each partner shall include in his individual income
tax return.
• Net income of the GPP shall be computed in the same manner as a corporation.
• GPP is not liable to income tax but, the partners shall be liable for the income tax only
in their separate and individual capacity.
• Each partner shall report as gross income his or her DISTRIBUTIVE SHARE (ACTUAL OR
CONSTRUCTIVE*) in the net income of the partnership
• Income payments made periodically or at the end of the taxable year made by a GPP to
the partners, such as drawings, advances, sharing, allowances, stipends, etc. is subject
to withholding tax (RR-11-2018): 10% if the amount of income payment is less than or
equal to P 720,000; and 15% if the amount of income payment is more than P 720,000.
*Actual distribution means, there is actual distribution of the share of the net income of GPP.
*Constructive distribution means, even though there is no ACTUAL distribution, the same is presumed
to be distributed to the partners at the end of the taxable year.
2. General Partnership (Commercial Partnership)

Partnership (other than GPP whether registered or not), for income tax purposes, are
considered as corporations and are therefore taxed as such.
• Partners are considered shareholders, and therefore profits distributed to them are
considered as dividends (As we have discussed in our Final Tax topic) subject to final
withholding tax.
• Being a final tax, share of a partner in the net income of a partnership subject to tax is
not included in the income tax return of the partners (rationale: 2 schemes are
mutually exclusive)
• Distributive share is equal to each partner’s distributive share of the net income
declared by the partnership for a taxable year net of tax
Brief summary of distinguishment between GPP and General Partnership (Commercial Partnership)
• As to taxability of the PARTNERSHIP ITSELF

- GPP is not subject to income tax and withholding tax. While, General Partnership is
treated as a corporation according to the Tax code. Hence, it is subject to 30% Corporate income
tax base on its taxable income.
• As to the DISTRIBUTIVE SHARES OF THE PARTNERS
- the distributive shares of a partner in a GPP is subject to Expanded Withholding tax of
10%/15% depending of whether it exceeds, at its par or below the P 720,000 income payment.
While, the share in the net income or distributive shares of a partner in a General partnership is
subject to Final Withholding tax of rate 10%
Allowable deductions
1. To General Professional Partnership

• RR-8-2018 provides that 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.
• 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. Meaning, under RR-8-
2018 Sec 8, the GPP may claim either ITEMIZED DEDUCTION or 40% of Gross income,
Optional Standard Deduction.
2. To the Partners of the GPP

• the share of a partner in the net income of a GPP, actually or constructively received
shall be reported as taxable income of each partner.
• RR-8-2018 provides that, partners comprising the GPP can no longer claim further
deduction from their distributive share in the net income of a GPP and are not allowed
to avail 8% income tax regime rate option since their distributive share from the GPP is
already NET OF COST and EXPENSES.
• If the partners 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 deduction or OSD.
Illustration
Data for 2019 taxable year of Sycip and Hernandez (SH) Partnership including the partners’ own income
are as follows:
SH
Partnership Sycip Hernandez
Gross Income P 2,000,000 P 800,000 P 1,000,000
Allowed Deduction 1,200,000 400,000 500,000
Drawing Accounts:
Sycip 150,000 30,000 0
Hernandez 120,000 0 20,000
Profit and Loss Ratio S-40%; H-60%
Questions:
1. Assuming the partnership is a General Partnership, compute the following:

a. Tax due of the partnership
b. Tax due of Sycip
c. Tax due of Hernandez
2. Assuming the same fact except that, the partnership is a General Professional Partnership, compute
the following:
a. Tax due of the partnership
b. Tax due of Sycip
c. Tax due of Hernandez
ANS:
1.
SH Partnership Sycip Hernandez
Gross Income P2,000,000 P800,000 P1,000,000
Allowed Deductions (1,200,000) (400,000) (500,000)
Taxable income P800,000 P400,000 P500,000
Tax Rate 30% TRAIN Table TRAIN Table
Tax Due a. P240,000 b. P30,000 c. P55,000
NOTE: the partnership in this case is a general partnership. Hence, the distributive share of the partners
is subject to final withholding tax of 10% and should not be reported to the income tax return of each
partners. Because, the 2 schemes of taxation of regular income tax and final tax is mutually exclusive.
SH Partnership Sycip Hernandez

Gross Income P2,000,000 P800,000 P1,000,000
Allowed Deductions (1,200,000) (400,000) (500,000)
Net income before SIPI P800,000 P400,000 P500,000
Share in partnership income (SIPI)
*320,000 **480,000
Taxable Income P800,000 P720,000 P980,000
Tax Rate EXEMPT TRAIN Table TRAIN Table
Tax Due a. P0 b. P110,000 c. P184,000
NET DISTRIBUTABLE SHARE = P 800,000
* Scyip Share (40% of 800T) = 320,000

** Hernandez Share (60% of 800T) = 480,000
Note: in accordance with RR-8-2018, the share of the partners in the GPP’s partnership income here
should be subjected to 10% WTX for Sycip and 15% WTX for Hernandez. However, for theory and board
purposes, when the problem is silent as to whether there is a need for the deduction of WTX, the
problem MUST give at least a HINT. Such as the phrase “ Gross of withholding” or “Net of withholding
tax”. Here, it is pretty obvious that there is none. Hence, there is no need to deduct WTX for this
problem.
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FAR EASTERN UNIVERSITY - MANILA

1. General Professional Partnership (GPP)

2. General Partnership (Commercial Partnership)

• As to taxability of the PARTNERSHIP ITSELF

1. To General Professional Partnership

2. To the Partners of the GPP

1. Assuming the partnership is a General Partnership, compute the following:

SH Partnership Sycip Hernandez

NET DISTRIBUTABLE SHARE = P 800,000

* Scyip Share (40% of 800T) = 320,000

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