Module 6

Income Taxation for Partnerships

Week 13 - 14

Introduction

This module tackles the general concepts about the accounting for income taxes for
partnerships. This also includes the discussion about the classification of partnerships
according to payment of taxes. Illustrations in identifying and computing the income
taxes for partnerships will be given.

Learning Objectives

After studying this module, students should be able to:

1. Understand the concept of income taxation for partnership.
2. Analyze situations with regards to the computation of income taxes for
partnership.

Discussion:
Taxation of Partnerships

In general, partnerships are considered corporations and taxable as such at 30% on

taxable income.

The following are exempt from income tax:

1. General professional partnerships
2. Joint venture or consortium formed for undertaking construction projects 3. Joint
venture or consortium engaged in petroleum, coal, geothermal and other energy
operations

Partnership

A partnership is defined as a contract whereby two or more persons bind themselves to

contribute money, property or industry to a common fund to engage in profitable
activities with the intention of dividing the profits among themselves.

Classification of Partnership
1. General Professional Partnership (GPP)
2. General Co-Partnership (GCP)

General Professional Partnership (GPP)

General Professional Partnership (GPP) A GPP is one formed by two or several persons
for the sole purpose of exercising their common profession of which no part of income is
derived from engaging in any trade or business. A GPP is exempt from income tax but
required to file a tax return.

Ex. CPA Firms, Law Firms, Medical Partnerships, etc..

Guidelines to be followed for GPP

1. The partners in a general professional partnership shall be liable for income tax
only in their separate and individual capacities.

2. Each partner shall report his distributive share, actually or constructively received
in the net income of the partnership as gross income. The share of a partners
shall be subject to 10% creditable withholding tax.

If the income payments to the partner for the current year exceeds P720,000, the
withholding tax is 15%.
3. The partner is deemed to have elected the itemized deductions unless he
declares his distributive share undiminished by his share of the itemized
deductions.

A forty percent (40%) OSD is deductible from the distributive share of the gross
income if such gross income was not previously reduced by the partnership's
itemized deduction.

4. For purposes of computing the distributive share of the partners, the net income
of the partnership shall be computed in the same manner as that of a corporation.

Illustration 1

Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership) with a net
income before tax of P200,000. Atty. Liu has 60% 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 P200,000 and related expenses of P80,000.
Compute the following:

1. How much is the income tax of B&J?

2. How much is the net income tax payable of Atty. Liu if the partnership withheld a
10% withholding income tax.

Answers:
1. How much is the income tax of B&J?
B&J Partnership’s income is tax-exempt because it is engaged in purely
professional services.
 2. How much is the net income tax payable of Atty. Liu if the partnership withheld a
10% withholding income tax?
Atty. Liu, being engaged in business, is liable for income tax only in his separate
and individual capacity and should not in any way change the tax status of B&J
partnership as a general professional partnership.

Illustration 2

Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership) with a net
income before tax of P200,000. Atty. Liu has 60% 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 P200,000 and related expenses of P80,000.

The income tax due of Atty. Liu would be:

Share from the gross income of professionalP 120,000
partnership Gross income from buy and sell
business Less: Allowable deductions
Less: Allowable deductions Income before personal exemptions
Income before personal exemptions Less: Personal exemption – basic
Less: Personal exemption – basic Taxable Income
Taxable Income
Tax on P190,000
Tax on P140,000 Tax on excess (P50,000 x 25%)
Tax on excess (P50,000 x ) Income tax due
Income tax due Less: Tax withheld by the partnership
Less: Tax withheld by the partnership (P120,000x10%) Income tax still due
(P120,000x ) Income tax still due
Notes:
80,000 120,000 P 240,000
50,000
190.000

22,500
Answers: 12,500
35,000_
The income tax due of Atty. Liu would be: (12,000)
Share from the gross income of professional23,000
partnership (P200,000 x 60%)
Gross income from buy and sell business P
200,000
 1. The Tax Code (RA 8424) provides that the partner’s distributive share from the
net income of the general professional partnership be included as a part of
individual taxpayer’s gross income.

2. P.D. 1773 allows OSD if the reported income of the individual partner as share
form the general professional partnership is not previously reduced by the
partnership’s business expenses.
3. If the share received by an individual taxpayer from a professional partnership is
based on net income of the partnership (gross income minus allowable itemized
deductions), it shall no longer be allowed to deduct 40% OSD; otherwise, there
will be a double deduction.

General Co-Partnership GCP)

A GCP (compania-colectiva) is a partnership wherein part or all of its income is derived

from the conduct of trade or business.

For taxation purposes, the general co-partnership is considered as a corporation and

therefore liable to corporate tax of 30%. A general commercial partnership is also
subject to MICIT in the same manner as a corporation.

In a commercial partnership, the partners are considered as stockholders. The

profits distributed to them by the partnership are considered dividends and subject to
a final tax of 10%.
Illustration 3

J and B are partners of JB’s Enterprises, sharing 60% and 40% profit and loss,
respectively. The partnerships net income before tax during the year amounts to
P2,000,000.

Determine the following:

1. Income tax due of JB’s Enterprises
2. Final income taxes on the share of J and B partners.

Answers:
1. Income tax due of JB’s Enterprises.
Net income 2. Final income taxes on the share of J and
Multiplied by corporate normal tax rate B partners.
Income tax Due P2,000,000 30%
P600,000

Net income after tax (P2,000,000-P600,000) P1,400,000

Distribution of net income Partner A Partner B P840,000(60%) P560,000 (40%)

Multiplied by final tax rates 10% 10% . Final income taxes P 84,000 P56,000

General Professional Partnership Engaged in Commercial Activity

To be nontaxable, a GPP should be for the sole purpose of exercising the partners’
common profession.

If the GPP is engaged in trade or business other than the practice of the partners’
common profession GPP becomes taxable as a corporation.

A taxable partnership is subject to regular corporate income tax ( 30% based on the net
taxable income) or minimum corporate income tax (2% based on the gross income)
starting from the 4 the year of its business operation.

Illustration 4

JB Partnership of James and Benjie reported the following

earnings: Professional fee P100,000
Professional expenses 60,000
Business income – trading 200,000
Business expenses – trading 120,000
Question:
Will JB partnership be liable to income tax?

Answer: JB partnership is liable to pay income tax, because it earned business income.
It is a clear indication that the partnership is engaged in activities other than professional
services. Hence, it is considered and treated as a corporation which is liable to
corporate income tax of 30% or MCIT.

The income tax payable of JB Partnership would be:

Revenues
Professional fee P100,000
Business income – trading 200,000 P300,000 Expenses:
Professional 60,000
Business – trading 120,000 180,000 Net taxable income 120,000
Multiplied by corporate income tax rate 30%

Assume that the partners agreed to divide the net income equally, the tax pertinent to
the shares of James and Benjie would be:

Net income before income taxes P120,000

Less: Income tax 36,000
Net Income for distribution P 84,000
James Benjie
Profit distribution P42,000 P42,000 Multiplied by tax for dividends 10% 10%
Final tax withheld by the partnership 4,200 4,200

It must be observed that the taxable income of the co-partnership , less corporate
income tax, shall be taxable to partners, whether actually distributed or not.