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04 Income From Business or Exercise of Profession

This document discusses income taxation for self-employed individuals and professionals who derive income from business or the exercise of their profession. It covers topics such as: (1) income derived from sole proprietorships, partnerships, and corporations; (2) the distinction between general professional partnerships and ordinary partnerships; and (3) deductions and tax treatments that apply to general professional partnerships and their partners.

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Gabriel Paolo Orcine Pila
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47 views

04 Income From Business or Exercise of Profession

This document discusses income taxation for self-employed individuals and professionals who derive income from business or the exercise of their profession. It covers topics such as: (1) income derived from sole proprietorships, partnerships, and corporations; (2) the distinction between general professional partnerships and ordinary partnerships; and (3) deductions and tax treatments that apply to general professional partnerships and their partners.

Uploaded by

Gabriel Paolo Orcine Pila
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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INCOME TAXATION

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Atty. Carlos G. Baniqued


Income from Business or
Exercise of Profession

Atty. Carlos G. Baniqued


Ø Income derived from conduct of trade or business by self-
employed individuals or businessmen
Ø Income derived from conduct of trade or business by
juridical persons, such as corporations, partnerships,
associations, etc.
Ø The trade or business may be manufacture and/or sale of
goods or sale of services.
Ø Income derived from exercise of profession.
Ø Unlike salaried individuals, self-employed and professionals
may claim ordinary and necessary business expenses as
deductions from their gross income derived from conduct
of trade or business or exercise of profession.

Atty. Carlos G. Baniqued


Ø “Self-employed” may refer to a sole proprietor, an
independent contractor, or a professional who
earns income from self-employment.
Ø A “professional” refers to a person formally
certified by a professional body to a specific
profession by virtue of having completed a
required examination or course of study and/or
practice. It may also refer to a person who
engages in some art or sport for money, as a
means of livelihood. E.g., lawyers, doctors, CPAs,
professional athletes, artists, consultants, etc.

Atty. Carlos G. Baniqued


Partners’ Distributive Share in Net Income of a
General Professional Partnership (GPP)
Ø A GPP is not a taxable entity. It is not treated as a
“corporation”.
Ø GPP is merely a “pass-through” entity. It is the
individual partners comprising the GPP who are subject
to income tax on their distributive share, actually or
constructively received, in the net income of the GPP.
Ø Although not a taxable entity, the GPP nevertheless
files a tax return (as an exempt entity) that sets forth
its items of gross income, deductions claimed, names
of the partners, and the distributive share of each
partner.

Atty. Carlos G. Baniqued


Ø For purposes of computing the distributive share
of the partners, the net income of the GPP is
computed in the same manner as a corporation.
Ø Thus, the GPP may deduct is cost of services that
includes all direct costs and expenses incurred to
provide the services required by its clients, such
as salaries and employee benefits of personnel
directly rendering the services and cost of
facilities directly utilized in providing the service
such as depreciation or rental of equipment used
and cost of supplies.

Atty. Carlos G. Baniqued


GPP vs. Ordinary Partnership
GPP Ordinary Partnership
• Not a taxable entity. • Taxable like a corporation,
hence, pays 20%-25%
• Partners are taxed on their income tax.
distributive share of the net • Partners are taxed on their
income of the GPP, actually distributive share in the net
or constructively received, income (after corporate
at the graduated income income tax) of the
rates. In practice, though, partnership, whether
partners report their actually distributed or not,
distributive share whether in the nature of dividends,
actually distributed or not. hence, 10% withholding tax.

Atty. Carlos G. Baniqued


GPP Ordinary Partnership
• Not subject to MCIT. • Subject to MCIT?

Atty. Carlos G. Baniqued


GPPs Exempt from Withholding Tax
ØProfessional fees paid to GPPs are not subject
to the creditable withholding tax on the
theory that GPPs are not taxable entities.
ØThere are merely “pass-through” entities since
it is the individual partners who are taxable in
their separate and individual capacities.

Atty. Carlos G. Baniqued


Deductions Available to GPPs
Ø Can claim either itemized deductions or OSD in
computing its net income for distribution to partners.
Ø Once the GPP has claimed itemized deductions or OSD,
the individual partners could no long claim any
itemized deduction or OSD against their distributive
share since the latter is already net of direct cost and
operating expenses. Rev. Regs. No. 08-2018
Ø However, if the individual partners derive other income
from business or other sources (such as consultancy,
director’s fees, etc.), they could still claim itemized
deductions or OSD against such other income. Ibid.

Atty. Carlos G. Baniqued


8% Income Tax Rate Not
Applicable to Distributive Share
ØNeither could the partners avail of the 8%
income tax on gross sales or gross receipts not
exceeding P3 Million under Section 24(A)(b) or
(c) of the NIRC since their distributive share in
the net income of the GPP is already net of
cost and other operating expenses. Ibid.

Atty. Carlos G. Baniqued


Distributive Share Not Subject to VAT
ØThe gross sales or receipts of the GPP are
already subjected to value-added tax upon
receipt by the GPP, with the latter filing
monthly and quarterly VAT returns.
ØThus, the partners’ distributive share is no
longer subjected to VAT since the basis of the
distributive share is exactly the same sales or
receipts that had already been subjected to
VAT in the hands of the GPP.

Atty. Carlos G. Baniqued

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