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10 Income Tax On Partnership

The document outlines the taxation of partnerships, specifically distinguishing between General Professional Partnerships (GPP) and General Partnerships for tax purposes. GPPs are not subject to income tax but must file returns to report partner shares, while General Partnerships are taxed as corporations with profits treated as dividends. Allowable deductions for GPPs include itemized deductions or an optional standard deduction, but partners cannot claim further deductions from their distributive share.

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24 views40 pages

10 Income Tax On Partnership

The document outlines the taxation of partnerships, specifically distinguishing between General Professional Partnerships (GPP) and General Partnerships for tax purposes. GPPs are not subject to income tax but must file returns to report partner shares, while General Partnerships are taxed as corporations with profits treated as dividends. Allowable deductions for GPPs include itemized deductions or an optional standard deduction, but partners cannot claim further deductions from their distributive share.

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sandra.ng.rocha00
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We take content rights seriously. If you suspect this is your content, claim it here.
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Income Tax on Partnerships

• A Partnership is defined as “a contact whereby two or more


persons bind themselves to contribute money, property, or
industry to a common fund, with the intension of dividing the
profits among themselves “. Two or more persons may also
form a partnership for the exercise of profession (Art. 1767 of
the Civil Code).
• Partnership has a juridical personality separate and distinct
from, except where immovable property or real right are
contributed there to in which case a public instrument shall
be necessary.
•Kind 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. Under Section 26 of the tax Code and
pertinent revenue regulation, a GPP is not to income tax and
consequently withholding tax.

•However, a GPP is required to file income tax return for the


purpose of furnishing information as to the share of each partner in
the net income of the partnership which each partner shall include in
his individual income tax return.

•For this purpose, the net income of GPP shall be computed in the
same manner as a corporation.
• Partner shall be liable for income tax on their separate
and individual capacities. Each partner shall report as a
gross income his or her distributed 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, sharing allowances, stipends,
etc. is subject to 15% creditable withholding tax if the
amount of income payment is more than P720,000,
otherwise, 10% (RR 11-2018;TRAIN Law).
2.General Partnership (Commercial Partnership)
• Partnership (other than general professional partnership, whether
registration or not), for income taxation purposes, are considered as
corporations and are therefore taxed as such.

• Partners are considered shareholders, and therefore, profits


distributed to them are considered as dividends subject to final
withholding tax.

• The share of a partner in the net income of a partnership subject to tax


is not 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 tax.
*Answer: P0.
• A GPP is not subject to income tax (on its income
derived from its operation).
• Nonetheless, it is final taxes on passive income and
capital gains tax. In addition, the GPP is required to file
its income tax return (on its ordinary income) in order
to determine the correct distributive share of the
partners to be traced in their individual income tax
returns.
•
• **The distributive share (from operations of the GPP) is
subject to creditable withholding tax.
• The share of the partner from the GPP’s ordinary income shall
be included in the taxable net income or in the ITR of each
partner.
• Distributive share from income of the GPP already subjected
to final withholding taxes including incomes exempt from
income tax shall not be included in the computation of a
partner’s taxable income because these incomes were
already taxed and/or exempt from tax.
•
Allowable Deduction to General Professional Partnerships
• RR 8-2018 provides that a GPP is not a taxable entity for income tax
purposes since it is only acting as a “pass-through” entity where its
income is ultimately taxed to the partners comprising it.
• Section 26 of the Tax Code, as amended, likewise provides that, “for
purposes of computing the distributive share of the partners, the net
income of a GPP shall be computed in the same manner as a
corporation”.
• As such, a GPP may claim either the itemized deduction allowed under
Section 34 of the Tax Code or in lieu thereof, it can opt to avail of the
optional standard deduction (OSD) allowed to corporations in claiming
the deduction in an amount not exceeding forty percent 40% of its
gross income.
In computing the taxable income of a GPP as defined
under Section 31 of the Tax Code, as amended, the
following may be allowed as deductions from the gross
income.
a.Itemized Deduction: Itemized expenses which are
ordinary and necessary, incurred or paid for the
practice of profession (Allowable deductions from
gross income);or
b.Optional Standard Deduction (OSD): 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 taxable income
of each partner.
• RR 8-2018 implementing the income tax provision of RA
10963 (TRAIN Law) also provides that, the partners
comprising the GPP can no longer claim further deduction
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.
• RR 8-2018 further provides that, 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 deductions or OSD.

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