INCOME TAX FOR PARTNERSHIP

CHAPTER 6
PARNERSHIP DEFINITION

Is “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”.
PARNERSHIP

• Two or more person may form a partnership for the

exercise of profession
• Partnership has a juridical personality separate and
distinct from that of each of the partners
KINDS OF PARTNERSHIP FOR TAX PURPOSES

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
• GPP Is not subject to income tax and
consequently to creditable withholding tax
KINDS OF PARTNERSHIP FOR TAX PURPOSES

1. 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 partners in the net income
of the partnership which each partner shall
include in his individual income tax return
• The net income of a GPP shall be computed in
the same manner as a corporation
KINDS OF PARTNERSHIP FOR TAX PURPOSES

1. General Professional Partnership (GPP)

• Partners shall be liable for income tax only in their
separate and individual capacities. Each partner shall
report as a 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, sharings, allowances, stipends, etc.
is subject to 15% creditable withholding tax if the amount
of income payment is more than 720,000 otherwise1 10%
under TRAIN Law
 SAMPLE COMPUTATION OF A PARTNER’S
DISTRIBUTIVE SHARE IN THE NET INCOME OF A
GPP:
Income from Passive Incomes Capital Gains net Total
Operations net of FWT of CGT
Gross Income-GPP 1,000,000
Allowable 400,000
Deduction
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 GPP

** Total distributive share of a partner
SAMPLE COMPUTATION OF A PARTNER’S
TAXABLE NET INCOME:
Amount

Gross Compensation Income (if any) 800,000

Gross Business Income (if any) 2,400,000

Allowable deductions from gross business income (1,200,00)

Share in the Net Income of the GPP 300,000

Partner’s Taxable Net Income 2,300,000

The other income of the GPPs as shown on the previous slide

are not included in the computation of a partner’s taxable net
income because those incomes where already subjected to
FWT on passive incomes or CGT
KINDS OF PARTNERSHIP FOR TAX PURPOSES

2. General Partnership (Commercial Partnership)

• Partnership (other than GPP whether registered
or not), for income taxation purposes, are
considered as corporations and are therefore
taxed as such.
• Partners are considered as shareholders, and
therefore, profits distributed to them are
considered as dividends subject to final
withholding tax.
KINDS OF PARTNERSHIP FOR TAX PURPOSES

2. General Partnership (Commercial Partnership)

• Being a final tax, the share of a partner in the net
income of a partnership subject to tax is NOR
RETURNABLE in the partner’s personal income tax
return.
• 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
 SAMPLE COMPUTATION OF A PARTNER’S
DISTRIBUTIVE SHARE IN THE NET INCOME OF A
GP:
Income from Passive Incomes Capital Gains Total
Operations net of FWT net of CGT
Gross Income-GP 1,000,000
Allowable Deduction 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%
Share in Income 210,000 40,000 10,000 *** 260,000
* a GP is subject to RCIT or MCIT, whichever is higher
** total distributable income of GPP
*** total distributive share of a partner. The partner’s share is treated as dividend income from a
domestic corporation, hence, subject to final withholding tax on dividend income. Consequently,
this amount shall not be included in the computation of a Partner’s taxable net income.
SAMPLE COMPUTATION OF A PARTNER’S
TAXABLE NET INCOME:
Amount

Gross Compensation Income (if any) 800,000

Gross Business Income (if any) 2,400,000

Allowable deductions from gross business income (1,200,00)

Share in the Net Income of the GP N/A

Partner’s Taxable Net Income 2,000,000

The other income of the GPPs as shown on the previous slide

are not included in the computation of a partner’s taxable net
income because those incomes where already subjected to
FWT on passive incomes or CGT
SAMPLE PROBLEM

De Leon, Bobadilla and Ocampo (DBO) is a general

professional partnership (GPP). The partners are
participating equally in the income and expenses of
the GPP. The ff. are the data for the partnership and
the partners in 2018.

DBO De Leon Bobadilla Ocampo

Gross Income 5,000,000 3,500,000 2,000,000 2,800,000
Expenses 3,500,000 1,200,000 600,000 825,000
Income Subject to 600,000 200,000 200,000 200,000
Final taxes (net)
SAMPLE PROBLEM

Using the previous problem answer the ff. questions:

1. How much is the taxable income of the partnership?
2. How much is the distributive share of each partner in the
income if the GPP?
3. How much is the taxable income of De Leon in 2018?
4. Assume the partnership is a GENERAL Partnership, how
much is the taxable income of the Partnership and amount
of applicable tax?
5. Using the same assumption in Question #4, how much is the
taxable income of Ocampo in 2018?
6. Using the same assumption in Question #4, how much is the
final tax of each partner from their share in the income of
partnership?
ALLOWABLE DEDUCTIONS TO GENERAL
PROFESSIONAL PARTNERSHIP
a. Itemized Deductions: Itemized expenses which are
ordinary and necessary, incurred or paid for the
practice of profession

b. Optional Standard Deduction: 40% of gross income

in lieu of itemized expenses
ALLOWABLE DEDUCTIONS TO THE PARTNERS
COMPRISING GPP
The share of a partner in the net income of a GPP,
actually or constructively received, shall be reported
as a taxable income of each partner. 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 the 8%
income tax rate option since their distributive share
from the GPP is already net of costs and expenses
ALLOWABLE DEDUCTIONS TO THE PARTNERS
COMPRISING GPP
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
SAMPLE PROBLEM

Bobadilla (married with one dependent child) formed a

partnership with Trinidad (single), participating equally in the
partnership’s income and expenses. The ff. are the data for
the partnership and the partners in 2018:

BT Partnership Trinidad Bobadilla

Gross Income 600,000 350,000 400,000
Operating Expenses 350,000 140,000 220,000
SAMPLE PROBLEM

Using the previous problem answer the ff. questions:

1. Assuming the partnership is a GPP, how much is distributive
share of Trinidad in the income of the partnership?
2. How much is the taxable income of Trinidad?
3. Assuming the partnership is a general partnership, how
much is taxable income of Trinidad?
SAMPLE PROBLEM

Bobadilla (married with one dependent child) formed a

partnership with Trinidad (single), participating equally in the
partnership’s income and expenses. The partnership opted to
use OSD in computing its net income. The ff. are the data for
the partnership and the partners in 2018:

BT Partnership Trinidad Bobadilla

Gross Income 600,000 350,000 400,000
Operating Expenses 350,000 140,000 220,000
SAMPLE PROBLEM

Using the previous problem answer the ff. questions:

1. How much is the distributive share of Trinidad in the income
of the partnership assuming the latter is a GPP?
2. How much is the taxable income of Trinidad?
3. Assume Trinidad also opted to use OSD in computing its
taxable business income and the gross sales of Trinidad is
550,000, how much is taxable income of Trinidad?
4. Assuming the partnership is a GP, how much is taxable
income of Trinidad?