TAXATION OF

PARTNERSHIPS
& PARTNERS
KINDS OF PARTNERSHIP
1. Exempt Partnerships – these kinds of partnerships
are exempt from tax. However, they are required to
file an income tax return of their income for the
purpose of furnishing information as to the share in the
gains or profits which each partner shall include in his
income tax return. An example of tax exempt
partnership is a general professional partnership.
2. Taxable partnerships (all other partnerships) – these
are considered corporations subject to corporate tax.
The examples of taxable partnerships are the business
partnerships and unregistered partnerships.
TAX LIABILITY OF PARTNERS
1. Share in the net income of a general professional
partnership
Persons engaged in business as partners in a
general professional partnership shall be liable for
income tax only in their separate and individual
capacities.

Under the principle of constructive receipt, the

share in the net profits to which any taxable
partners would be entitled to shall be taxable to
him whether distributed or otherwise
In determining the partner’s distributive share in net
income of the partnership:
1. Each partner shall report as gross income his
distributive share, actually or constructively received,
in the net income of the partnership.
2. Income payments made periodically or at the end of
the taxable year by a general professional
partnership to the partners, such as drawings,
advances, sharings, allowances, stipends, etc. shall be
subject to a creditable withholding tax of fifteen percent
(15%), if the gross income in one taxable year exceeds
P720,000, and ten percent (10%) if otherwise.
Case 4-4

Alma and Lorna organized an accounting firm which they

named as Alma, Lorna and Associates. The profit and loss
sharing ratio is 50% for Alma and 50% for Lorna. In
2014, the partnership had a gross income of P380,000
and expenses (including salary) of P180,000. During the
year, each of them received salary of P60,000 from the
partnership.
Question 1 : Is the partnership subject to income tax?

Answer:

Question 2: Is the partnership required to file an income

tax return?

Answer:
Question 3: Assuming no profits were distributed to the
partners, how much share in net income should be
reported by the partners in their income tax return?

Answer:
Question 4 : How much income should be reported by the
partners in their income tax returns assuming that Alma
and Lorna received P10,000 each as partial distribution
of their shares in the net income of the partnership?

Answer:
TAX LIABILITY OF PARTNERS
1. Share in the income of taxable partnerships
a. The share of a citizen or resident alien individual
partner in the distributable net income tax of a
partnership is subject to a final withholding tax of ten
percent (10%) whether distributed to the partners or not.
b. The share of a partner who is a non-resident
alien engaged in trade or business in the Philippines in the
distributable net income after tax of a taxable
partnership shall be subject to a final withholding tax of
twenty percent (20%) and twenty five percent (25%) for
non-resident alien not engaged in trade or business in the
Philippines.
Case 4-4

The following pertains to the 2011 data of Colleen

Partnership, a business partnership:

Gross income P 500,000

Deductions 300,000

Partners Juan Tibay and Maria Sinukuan agreed on a

profit and loss sharing ratio of 60% and 40%,
respectively.
Question 1 : How much is the tax liability of the
partnership?

Answer:
Question 2: Are the shares of Tibay and Sinukuan in the
partnership net income returnable for income tax
purposes?

Answer:
Question 3: How much is the income tax on the share of
Juan Tibay in the partnership income if he is single?

Answer:
CO-OWNERSHIP

There is co-ownership whenever the ownership of

an undivided thing or right belongs to different
persons.

A co-ownership is exempt from tax if the

activities of the co-owners are limited to the
preservation of the property and the collection
of the income therefrom.
CO-OWNERSHIP

Instead of being subjected to income tax, the

income of the co-ownership is divided among the
co-owners based on their share in the co-
ownership. Thereafter, each of them will report
his net income on the basis of such distribution.
That share of the co-ownership is then added to
the personal individual return of each individual
co-owner.
TAXATION OF
ESTATES AND
TRUSTS
DEFINITIONS
 Estate (Inheritance) – refers to all property, rights and
obligations of a person which are not extinguished by his
death and also those which have accrued thereto since the
opening of the succession.
 Heir – person called to succession either by the provision
of a will or by operation of law.
 Trust – an arrangement created by will or an
arrangement under which title to property is passed to
another for conservation of investment with the income
therefrom and ultimately the corpus (principal) to be
distributed in accordance with the directions of the
creator as expressed in the governing instrument.
DEFINITIONS
 Trustor or grantor – the person who establishes a
trust.
 Trustee – the one in whom confidence is reposed as
regards property for the benefit of another person.
 Beneficiary – the person for whose benefit the trust
has been created.
 Fiduciary – general term which applied to all
persons or corporations that occupy positions of
peculiar confidence towards others, such as trustees,
executors, or administrators.
TAXATION OF ESTATES
Estates are taxable only if they are under judicial
settlement. They are under judicial settlement if they
are the object of judicial testamentary or intestate
proceedings.

Estates not under judicial settlement are, as general

rule, taxed as mere co-ownerships or general
professional partnerships.
TAXATION OF ESTATES
Angel, Bea and Charlene are heirs of decedent
Diana, whose estate earns an income of P250,000 a
year.
 If the estate is under judicial settlement, it is the

estate that pays the income tax.

 If it is not under judicial settlement, the heirs are

directly liable for the tax, according to their

respective share on the income.
Case 4 – 5
Dora died May 5, 2018 leaving the following:

Gross estate (under judicial settlement) P 2,750,000

Income earned in 2018 400,000
Expenses incurred in 2018 75,000
Amount distributed to beneficiaries:
Diana, single, with one dependent child ` 125,000
Dayanara, married 125,000

Dayanara is employed with the government. During the year, her total compensation income
was P150,000.

REQUIRED: Compute the income tax due

a. From the estate of Dora
b. From the beneficiaries assuming that Diana availed of OSD.
TAXATION OF TRUSTS
Irrevocable trusts must be irrevocable both as to
corpus and income. They are taxed exactly in the
same way as estates under judicial settlement,
including exemptions and rule of accrual. The basis
however, in computing the tax is the status of trustor.

A revocable trust is one where at any time the power

to revest (return) in the grantor title to any part of the
corpus (body) of the trust vested.
IMPOSITION OF TAX
The tax imposed upon individuals shall apply to the
income of estates of any kind of property held in trust,
including:

a. Income accumulated in trust for the benefit of unborn

or unascertained person or persons with contingent
interests, and income accumulated or held for future
distribution under the terms of the will or trust
b. Income which is to be distributed currently by the
fiduciary to the beneficiaries, and income collected by
a guardian of an infant which is to be held or
distributed as the court may direct
IMPOSITION OF TAX
c. Income received by estates of deceased persons
during the period of administration or settlement of
the estate; and
d. Income which, in the discretion of the fiduciary, may
be either distributed to the beneficiaries or
accumulated.
Case 4 – 6

Bill created an irrevocable trust in favor of his two

minor children. The trust stipulates that 50% of the
net income should be distributed yearly to the
children, share and share alike, the balance to
accumulate for eventual distribution to the children
at age 25. The income for 2018 was P1 million.
Question No. 1 – How will the income of the trust be taxable?

Answer:

Question No. 2 – Will your answer be the same is the trust

established by Bill is revocable?

Answer:
TAXABLE INCOME OF ESTATES AND TRUSTS

In computing the taxable income of an estate or trust,

the following are the allowable deductions:
1. The amount of the net income of the estate and
trusts for the taxable year which is to be
distributed currently by the fiduciary to the
beneficiaries.
2. The amount of the income collected by a guardian
of an infant which is to be held or distributed as
the court may direct.
TAXABLE INCOME OF ESTATES AND TRUSTS

3. The amount of the income received by estates

during the period of administration or settlement,
properly paid or credited during the taxable year to
any legatee or heir; and
4. The amount of the income of the trusts, which in the
discretion of the fiduciary may be either distributed to
the beneficiary or accumulated properly paid or
credited during the taxable year to the beneficiary.
CONSOLIDATION OF INCOME OF TWO OR MORE
TRUSTS

Where, in case of two or more trusts, the creator in

each instance is the same person, and the beneficiary
in each instance is the same, the taxable income of all
trusts shall be consolidated and the tax computed on
such consolidated income and such proportion of said
tax shall be assessed and collected from each trustee
which the taxable income of the trust administered by
him bears to the consolidated income of the several
trusts.
Case 4 – 7
Alma created two trusts for her daughter Alice and appointed Anna
and Avy as trustees for Trust 1 and Trust 2, respectively. During the
year, the gross income of Trust 1 was P 120,000 and deduction of
P20,000, while Trust 2 had a gross income of P100,000 and a
deduction of P30,000.

REQUIRED: Compute the following

1. Tax due from the two trusts under trust consolidation
2. The share of each trust on the tax payable by the consolidated
trust
GOOD DAY!