7 Tax Partnership

Opening Prayer
Lord Eternal God, thank you for the

opportunity of this online class.
We are aware that without your divine
intervention, this online class will not be
possible and our work will be empty.
Grace us with wisdom and vision and gift us
with an open mind and humility so that not
only through this but in all our lives will be a
learning place for your kingdom.
We ask this through our Lord Jesus Christ
who lives with you in the unity of the Holy
Spirit now and forever…Amen
Saint John Baptist De La Salle…Pray for us

Live Jesus in our hearts…. Forever
Taxation of Partnerships
Banares, Armando L. CPA, PhD

Contract of Partnership
• Partners agree to contribute money, property or
industry to a common fund with the intention of
dividing the profits among themselves.
• Types of partnership
– General professional partnership (GPP) –
formed for the purpose of exercising common
profession; no part of income is derived from
engaging in any trade or business.
– General co-partnership (compania colectiva)
Guidelines: GPP
• Not subject to income taxes (income tax exempt) but is
required to file returns of its income
• Partner’s in GPP shall be liable for income tax in their
separate & individual capacities
• Each partner shall report as income in his return, his
distributive share in the net income of the partnership
whether actually or constructively received.
• Share of partner shall be subjected to creditable
w/holding tax as regard to current year income payment:
• 10% if income payments do not exceed P720,000,
• 15% if income payment exceed P720,000
Guidelines: GPP (cont.)
• The partner is deemed to have elected the itemized
deductions unless he declares his distributive share
undiminished by his share of the itemized
deductions:
• 40% OSD is deductible from distributive share of
the GI if such gross income was not previously
reduced by the partnership’s itemized deductions.
• Net income of partnership shall be computed in
the same manner as corporation
Partner’s Income
• Share in profit – distributed based on P&L agreement.
• If loss – shall be distributed according to profit sharing
ratio.
• Itemized Deductions – tax shall be based on his share of
the net income of the partnership
• Optional Standard Deductions (40% OSD) – partner must
declare his distributive share of the gross income of the
GPP undiminished by his share of the deduction.
• If GPP uses accrual basis of accounting, and partners on
his own transaction is on cash basis, the partner may
consolidate his share of the net income of the partnership
with his own income.
General Co-Partnership
• GCP – (compania-colectiva) is considered as a
corporation and therefore liable to corporate tax
of 30%.
• Tax Liability – GCP is considered as corporation
and therefore liable to corporate tax of 30% &
MCIT.
• Partners are considered as stockholders; profits
distributed to them are considered dividends
subject to final tax of 10% in 2000 thereafter. (6%
in 1998; 8% in 1999)
Partnership
Distribute income Reporting Income (Options)
(if net loss, partners shall be entitled to
deduct their respective shares in net operating loss)
based on P& L agreement ITEMIZED DEDUCTION
GPP PARTNERS
not subject to income tax CWT - 720,000 & below - 10% OPTIONAL STANDARD DEDUCTION (OSD)
- more than 720,000 - 15% (expenses is 40% of share in partnership income)
GCP STOCKHOLDERS
subject to income tax (30%) FWT - 10% subject to final tax
distributive share after corporate income tax 1998 6%
1999 8%
2000 10%
Sample#1: Tax on Partnership: Itemized versus OSD
James, married with an unemployed wife and one qualified dependent child,
and Ray, single, are partners in JR & Company, GPP. They are sharing
profits and losses as follows: James-70% and Ray-30%. For the calendar
year ended 200x, the income and expenses of the partnership and the
income and expenses of the personal accounts of partners are as follows:
JR & Co James Ray

Gross income 325,000
825,000 85,000 65,000
Allowable deductions 175,000
375,000 35,000 15,000
1. Compute the taxable income & tax due of James assuming he opted for
itemized deduction. (10 points)
Compute the taxable income & tax due of Ray assuming he opted for optional
standard deduction (OSD) deduction. (10 points)
Solution to Sample#1: Tax on Partnership: Itemized versus OSD
ANSWER Itemized OSD
Gross income 825,000 825,000

Allowable deductions 375,000 40% 330,000
Distributable income 450,000 495,000
James (70%) Ray (30%)

Distributable share 315,000 148,500
Other business income 85,000 65,000
Total income 400,000 213,500
Less itemized deductions 35,000 40% 26,000
Taxable income 365,000 187,500
Tax due 23,000 exempt

Sample#2: Tax on Partnership: GCP versus GPP
The following information were provided:
RR Partnership Rivera Reyes
Gross income 2,000,000 800,000 1,000,000
Allowable deductions 1,200,000 400,000 500,000
The partners share income and loss 40% to Rivera and 60% to Reyes. The
partners choose to be tax using the graduated tax table.
1. Compute the taxable income & tax due of the Partnership and the
partners assuming RR Partnership is an ordinary or general commercial
partnership.
2. Compute the taxable income & tax due of the Partnership and the
Partners assuming RR Partnership is a general professional partnership.
Solution to Sample #2 GCP versus GPP
CASE A -Ordinary Partnership

40% 60%
Gross income 2,000,000 800,000 1,000,000
Allowed deductions 1,200,000 400,000 500,000
800,000 400,000 500,000
Multiply tax rate 30% train table train table
Tax due 240,000 30,000 55,000
Notes:
1. RR Partnership as ordinary or GCP is subject to 30% tax rate just like a corporation. The amount
available for distribution to partners is P560,000 (P800,000 – P240,000)
2. The share of the partners in the partnership income: [Rivera: P560,000 x 40% = P224,000; Reyes;
P560,000 x 60% = P336,000].
3. The share of Rivera and Reyes is referred to as dividends income subject to 10% FWT.
4. Since dividends income is already subjected to FWT, they shall not be included in the computation of
individual taxable income of Rivera and Reyes.
Solution to Sample #2 GCP versus GPP
CASE B - General Professional Parnership (GPP)

40% 60%
Gross income 2,000,000 800,000 1,000,000
Allowed deductions 1,200,000 400,000 500,000
800,000 400,000 500,000
Share in partnership income 320,000 480,000
720,000 980,000
Multiply tax rate train table train table
Tax due 110,000 184,000
Notes:
1. RR Partnership as GPP is not subject to income tax or is TAX EXEMPT. Therefore the amount available
for distribution to partners is P800,000.
2. The share of the partners in the partnership income: Rivera: P800,000 x 40% = P320,000; Reyes;
P800,000 x 60% = P480,000.
3. The share of Rivera and Reyes are referred to as distributive share subject to 10% FWT (amount is lower
than P720,000).
4. The distributive share shall be included in the computation of individual taxable income of Rivera and
Reyes and will therefore be subject to income tax.
Closing Prayer
Dear Lord, the giver of all things, thank
you for all the blessings that you have
given us.
We are sorry for all our faults and we
humbly ask for your forgiveness.
Bless us dear God and teach us to love one
another and to love you above all things.
Saint John Baptist De La Salle…Pray for us
Live Jesus in our hearts…. Forever
Amen

7 Tax Partnership

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Opening Prayer

Lord Eternal God, thank you for the

Saint John Baptist De La Salle…Pray for us

Banares, Armando L. CPA, PhD

JR & Co James Ray

Gross income 825,000 825,000

James (70%) Ray (30%)

Tax due 23,000 exempt

RR Partnership Rivera Reyes

RR Partnership Rivera Reyes

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