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INCOME TAXES OF PARTNERSHIPS I. Classification 1.

General Professional 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 any trade or business. 2. General Co-Partnership / Business Partnership ~ part or all of its income is derived from the conduct of trade or business. Business net taxable income Passive Distributive share P72o,ooo and below More than P72o,ooo Business / Commercial NCIT 3o% or MCIT 2% FWT FWT of 1o% Professional Exempt FWT CWT of 10% CWT of 15%

DEDUCTIONS FROM GROSS INCOME Allowable Deductions ~ amounts allowed by the Tax Code to be deducted from gross income to arrive at taxable income. Itemized Deductions Expenses, Interest, Taxes, Losses, Bad Debts, Depreciation etc. Optional Standard Deductions (OSD) a standard deduction in an amount not exceeding 4o% of gross income Illustration#1: (General Professional Partnership) Atty. Liu is one of the partners of NUT & BOLT Partnership which is engaged in rendering professional services (the sole source of income of the partnership) with a net income before tax of P2oo,ooo. Atty. Liu has 6o% shares on the profit or loss of the partnership. The other income of Atty. Liu is a buy and sell business with a gross income of P200,ooo and related expenses of P8o,ooo. Assuming that Atty. Liu is married with 3 qualified dependent children, is NUT & BOLT partnership liable for income tax? How much is the income tax still due of Atty. Liu if the partnership withheld a 1o% withholding income tax? Illustration#2: (General Co-Partnership) WE Partnership of William and Edmund reported the following earnings: Professional fee P1oo,ooo Professional expenses 6o,ooo Will WE Partnership be liable to income tax?

Business income trading Business expenses trading

P2oo,ooo 12o,ooo

COMPARATIVE APPLICATION (General Professional Partnership vs General Co-Partnership) E. Cao and A. Co are partners of ATIN Partnership, where they share any profit or loss equally. Both partners are single with no other source of income. ATIN Partnerships income and expenses are as follows: Gross income P5oo,ooo Allowable Deductions 1oo,ooo INCOME TAXES OF JOINT VENTURE Joint Venture ~ is a business activity that is organized only for a short-period of time, for it will be dissolve once its business objective is accomplished. ~ engaging in business in agreement with the Philippine Government is not subject to corporate income tax Illustration#3: (Joint Venture) X Co. and Y. Co., both domestic corporations, form a joint venture to construct a building with a contract price excluding VAT amounting to P5o,ooo,ooo. Total construction costs amounted to P4o,ooo,ooo. The corporations agreed to share any income or losses equally. Compute the related taxes of the joint venture and the joint venture partners assuming that the construction is not a government project. Co-ownership ~ when more than one person acquired the right to own a piece of property that may be due to succession of an estate or donation ~ tax-exempt although income derived from the property shall be reported in the co-owners individual tax return Illustration#4: (Co-ownership) After the death of their parents, A and B, both single individuals, inherited a P4,ooo,ooo worth of building through intestate succession. During the year, the building has a gross income of P4oo,ooo which was divided equally between A and B. How much is the income tax of the co-ownership? When Co-ownership is subject to Income tax 1. When a co-ownership is formed or established voluntarily, or upon agreement of the parties. 2. When the individual co-owner reinvented his share in the co-ownership to produce another income-generating activity. 3. Where the inherited property remained undivided for more than ten years, and no attempt was ever made to divide the same among the co-heirs, nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership. Illustration#5: (Co-ownership) Based on the illustration before, assume that after 1o years, A and B did not divide the property and they contributed money and their respective earnings from the co-ownership for the expansion of the business. INCOME TAXES OF ESTATE AND TRUST Estates Trust ~ all properties, rights and obligations of a person which are not ~ agreement/obligation imposed or right to administer over a property extinguished by his death that is to be transferred from the decedent to his given to a person for the benefit of another successors ~ to be taxable, the trust must be irrevocable ~ at the time of the settlement, based under the Tax Code, the estate itself is taxed Illustration#6: (Taxable Estate) Ms. Red Butterfly died on Aug. 14, 2012. Her estate is now under judicial settlement. The estate had P1,5oo,ooo gross income from Aug. 14 to Dec. 31, 2012. Expenses related to this income was P4oo,ooo. There was no distribution of income among the heirs. How much was the tax due for the year? Illustration#7: (Taxable Trust) Mr. Henry Argos created an irrevocable trust designating his two daughters, aged 3 and 1 as beneficiaries. Under the terms of the trust, only half of the income shall be distributed to the beneficiaries. The other half shall be left to accumulate and be distributed when the beneficiaries reach 21 years of age. For the year 2012, income of the trust was P5oo,ooo. Compute for the tax due.

Two or more Trusts ~ two or more trusts created by the same person for the same beneficiary Each trustee shall compute his share of the income tax on the consolidated taxable income by:

Illustration#8: (Two or More Trusts) Mr. Anilov maintains two irrevocable trusts that name his three children, all minors, as common beneficiaries. The terms of the trusts provide that no income shall be distributed to the beneficiaries until the youngest should become 25 years of age. Following are the data relative to the trusts: Trust 1 Trust 2 Gross Income P45o,ooo P6oo,ooo Deductions 15o,ooo 2oo,ooo

Illustration#1: (General Professional Partnership) The income tax due of Atty. Liu would be: Gross income professional partnership (P2oo,ooo x 6o% ) Gross income from buy and sell business Less: Allowable Deductions Income before personal exemption Less: Personal exemptions Basic Additional (P25,ooo x 3) Taxable income Tax on P7o,ooo Tax on excess (P115,ooo P7o,ooo) x 25% Income tax due Less: Tax withheld by the partnership (P120,ooo x 10%) Income tax still due Illustration#2: (General Co-Partnership) The income tax payable of WE Partnership would be: Revenues: Professional fee Business income trading Expenses: Professional Business trading Net taxable income Multiplied by corporate income tax rate Income tax due P1oo,ooo 2oo,ooo P6o,ooo 12o,ooo P2oo,ooo 8o,ooo P 5o,ooo 75,ooo P12o,ooo 12o,ooo 24o,ooo 125,ooo P 115,ooo P 8,5oo 11,25o P 19,75o 12,ooo P 7,75o

P3oo,ooo 18o,ooo P12o,ooo 3o% P 36,ooo

Assume that the partners agreed to divide the net income equally, the tax pertinent to the shares of William and Edmund would be: Net income before income taxes Less: Income Tax Net income or distribution Profit distribution (P84,ooo/2) Multiplied by tax for dividends Final tax withheld by the partnership William P42,ooo 10% P 4,2oo P12o,ooo 36,ooo P 84,ooo Edmund p42,ooo 10% P 4,2oo

COMPARATIVE APPLICATION (General Professional Partnership vs General Co-Partnership) As a general co-partnership, the income tax of ATIN Partnership is Gross income Less: Allowable deductions Net taxable income Tax rate of corporation Income tax of the partnership Income tax liabilities of the partners: Distributive shares of the partners (P4oo,ooo-P12o,ooo)/2 Tax rate on dividend income Income tax on distributive share of partners E. Cao P14o,ooo 10% P 14,ooo P5oo,ooo 1oo,ooo P4oo,ooo 30% P12o,ooo A. Co. P14o,ooo 10% P 14,ooo

As a general professional partnership, ATIN Partnership is exempted from income tax. The tax liability of the partners would be: E. Cao A. Co Distributive shares of E. Cao and A. Co (P5oo,ooo-P1oo,ooo)/2 P2oo,ooo P2oo,ooo Less: Personal exemption 5o,ooo 5o,ooo Net taxable income P 15o,ooo P 15o,ooo Tax on P14o,ooo Excess P1o,ooo x 25% Income Tax Less: Creditable withholding tax (P2oo,ooo x 1o%) P 22,5oo 2,5oo P 25,ooo 2o,ooo P 22,5oo 2,5oo P 25,ooo 2o,ooo

Income tax still due and payable Illustration#3: (Joint Venture) Contract price Less: Construction cost Gross income Less: OSD (P1o,ooo,ooo x 4o%) Net income of joint venture Multiplied by corporate normal tax rate Income tax due Illustration#4: (Co-ownership) Income derived by each of the co-owner that is subject to income tax Gross income received OSD (4o%) Personal exemption single Net taxable income Income Tax on P7o,ooo Illustration#5: (Co-ownership) Gross income Less: OSD (40%) Net taxable income Tax rate of corporation Income tax of the co-ownership Illustration#6: (Taxable Estate) Gross income Less: Deductions Personal Exemption Taxable Income Tax on P50o,ooo Tax on excess (P1,o8o,ooo P5oo,ooo) x 32% Income tax due Illustration#7: (Taxable Trust) Gross income Less: Deductions (50%) Personal Exemption Taxable Income Tax on P14o,ooo Tax on excess (P23o,ooo P14o,ooo) x 25% Income tax due Illustration#8: (Two or More Trusts) Consolidated Gross Income Less: Consolidated Deductions Consolidated Taxable Income Less: Personal Exemption Taxable Income Tax on P5oo,ooo Tax on excess (P68o,ooo P5oo,ooo) x 32% Income tax due on Consolidated Taxable Income Trust 1: Trust 2:

5,ooo

5,ooo

P5o,ooo,ooo 4o,ooo,ooo 1o,ooo,ooo 4,ooo,ooo 6,ooo,ooo 30% P 1,8oo,ooo

Co-owner A P2oo,ooo ( 80,ooo) ( 5o,ooo) P 7o,ooo P 8,5oo

Co-owner B P2oo,ooo ( 8o,ooo) ( 5o,ooo) P 7o,ooo P 8,5oo

P4oo,ooo 16o,ooo 24o,ooo 30% P 72,ooo

P4oo,ooo 2o,ooo

P1,5oo,ooo 42o,ooo P1,o8o,ooo P 125,ooo 185,6oo P 310,6oo

P25o,ooo 2o,ooo

P5oo,ooo 27o,ooo P23o,ooo P 22,5oo 22,5oo P 45,ooo

P1,o5o,ooo 35o,ooo P 7oo,ooo 2o,ooo P 68o,ooo P 125,0oo 57,6oo P 182,6oo