INCOME TAX ON Chapter 6

PARTNERSHIP
 PARTNERSHIP
oA contract whereby two or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of dividing profits among
themselves.
oPartnership has a juridical personality separate and distinct from that of each of the
partners.
 KINDS OF PARTNERSHIP
1. General Professional Partnership
o 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.
o It shall be noted that the tax exemption of GPPs shall pertain only to its ordinary income. Hence, a
GPP is subject to final withholding taxes on its passive incomes as well as capital gains tax.
o Partners shall be liable for income tax only on their separate and individual capacities. Each
partner shall report as gross income of his or her distributive share in the net income of the
partnership.
o 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 creditable
withholding tax (CWT) of:
o 15% CWT if the amount of gross income is more than 720,000
o 10% CWT if the amount of gross income is not more than 720,000
SAMPLE COMPUTATION OF A
PARTNER’S DISTRIBUTIVE SHARE IN THE
NET INCOME OF A GPP:
Income from Passive incomes net Capital Gains net of TOTAL
Operations of FWTx CGT
Gross Income – GPP 1,000,000

Allowable (400,000)
Deductions
Net income – GPP 600,000 80,000 20,000 700,000
X Partner’s P&L % 50% 50% 50%
Share in Income 300,000* 40,000 10,000 350,000**

*Total Distributive income of the GPP

** Total Distributive Share of a Partner
P&L = profit and loss
SAMPLE COMPUTATION OF A PARTNER’S TAXABLE NET INCOME
Gross compensation income (if any) 800,000
Gross business income (if any) 2,400,000
Allowable deductions from gross business income (1,200,000)
Share in net Income of the GPP 300,000*
Partner’s Taxable Net Income 2,300,000
KINDS OF PARTNERSHIP
2. General Partnership (Commercial Partnership)
• partnership that are considered as corporations.
•Partners are considered shareholders , and therefore, profits distributed to them are
considered dividends subject to FWTx.
•The share of the partner in the net income of the partnership 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 of tax.
SAMPLE COMPUTATION OF A PARTNER’S DISTRIBUTIVE SHARE IN THE NET INCOME OF A GP:
Income from Passive incomes net Capital Gains net of TOTAL
Operations of FWTx CGT

Gross Income – GP 10,000,000

Allowable Deductions (4,000,000)

Net income – GP 6,000,000

*X25% RCIT (1,500,000)
Net Income after Tax 4,500,000 80,000 20,000 520,000**

X Partner’s P&L % 50% 50% 50%

Share in Income 2,250,000 40,000 10,000 2,300,000***

*A general partnership is subject to RCIT or MCIT whichever is higher
** Total Distributive Income of the GP
*** Total Distributive Share of a partner
P&L = profit and loss
SAMPLE COMPUTATION OF A PARTNER’S TAXABLE NET INCOME
Gross compensation income (if any) 800,000
Gross business income (if any) 2,400,000
Allowable deductions from gross business income (1,200,000)
Share in net Income of the GP NA*
Partner’s Taxable Net Income 2,000,000
Cabarles, Ong, Sia & Co. CPAs, is a general professional partnership (GPP) with
assets of 25,000,000. the partners are participating equally in the income and losses
of the GPP. The following are the data for the partnership and the partners during
2023 taxable year:
GPP Cabarles Ong Sia
Gross Income 5,000,000 3,500,000 2,000,000 2,800,000
Expenses 3,500,000 1,200,000 600,000 825,000
Income subject 600,000 200,000 200,000 200,000
to Final Taxes
(net)

Q1: How much is the taxable income of the Partnership?

Q2: How much is the distributive share of each partner in the income of GPP?
Q3: How much is the taxable income of Cabarles?
Q4: Assume the partnership is a GP, how much is the taxable income of the
partnership and amount of applicable tax?
Q5: Using the same assumption in Q4, how much is the taxable income of Sia?
Q6: Using the same assumption in Question 4, how much is the final tax of each
partner from their share in the income of partnership?
QUESTION 1
ANSWER: 0
GPP is not subject to income tax on its income derived from its operation.
QUESTION 2
Gross income of the GPP 5,000,000
Allowable deductions (3,500,000)
Net income from operations- GPP 1,500,000
Income subject to final taxes (net) 600,000
Total distributable income of the GPP 2,100,000
divided by 3 (equal sharing) 3
distributive share of each partner 700,000
QUESTION 3
Gross income, Cabarles 3,500,000
Allowable deductions 1,200,000
Net business income, Cabarles 2,300,000
ADD: Distributive share in the income 500,000
of GPP (1.5M /3)
Total taxable income- Cabarles 2,800,000
QUESTION 4
Gross income 5,000,000
Allowable deductions (3,500,000)
Taxable income 1,500,000

Taxable income 1,500,000

20%
300,000
QUESTION 5
Gross income – Sia 2,800,000
Allowable deductions 825,000
Taxable income – Sia 1,975,000
QUESTION 6
Gross income Partnership 5,000,000
Allowable deductions (3,500,000)
Net income from operations- GPP 1,500,000
Less: tax Due @20% (MSME) (300,000)
Net Income of the GPP from operations 1,200,000
after tax
Income subject to final taxes (net) 600,000
Total distributable income of the GPP 1,800,000
divided by 3 (equal sharing) 3
distributive share of each partner 600,000
X FWT rate on dividend income 10%
FWTx of each partner 60,000
ALLOWABLE DEDUCTIONS TO GPP
- for purposes of computing the distributive share of the partners, the net income of
GPP shall be computed in the same manner as corporation
A. Itemized deduction – itemized expenses which are ordinary and necessary incurred
or paid for he practice profession
B. Optional Standard Deduction – 40% of gross income in lieu of itemized expenses
or deductions
CASE A: ITEMIZED DEDUCTIONS
Bobadilla formed a partnership with Buladaco, participating equally in the
partnership’s income and expenses. The following are the data provided by the
partnership and partners in 2023:

BB Partnership Buladaco Bobadilla

Gross Income 600,000 500,000 400,000
Operating expenses 350,000 200,000 220,000
QUESTION 1: Assuming the partnership is GPP, how much is the distributive share of
Buladaco in the income of partnership?

GPP’s Gross Income 600,000

OPEX (350,000)
GPP’s distributable income 250,000
x P&L % of each partner 50%
Share in the net income of GPP 125,000
Q2: How much is the taxable income of Buladaco?
Gross income – Buladaco 500,000
Less: OPEX – Buladaco (200,000)
Net Income 300,000
Add: Share in GPP’s income 125,000
Total taxable Net Income Buladaco 425,000
Question 3: Assuming the partnership is a general partnership, how much is taxable
income of Buladaco?
Gross income – Buladaco 500,000
Less: OPEX – Buladaco (200,000)
Taxable Net Income 300,000
CASE B: OPTIONAL STANDARD
DEDUCTION
How much is the distributive share of Buladaco in the income of the partnership and
assuming further that the latter is a GPP?

GPPs Gross Income 600,000

OPEX using OSD (600,000 x 40%) (240,000)
GPPs Distributable income 360,000
x P&L % of each partner 50%
Share in the net income of GPP 180,000
Q2: How much is the taxable income of Buladaco?
Gross income of Buladaco 500,000
OPEX (200,000)
Net Income 300,000
Share in GPPs income 180,000
Total Taxable Income of Buladaco 480,000
Q3: Assume Buladaco opted to use OSD in computing his taxable business income;
and Gross sales of Buladaco was 800,000. How much is the taxable income of
Buladaco?

Gross Sales –Buladaco 800,000

OPEX (800,000 x 40%) (320,000)
Net Income 480,000
Add: Share in GPP’s Income 180,000
Total Taxable income of Buladaco 660,000

*is OSD is availed by an individual tax payer, the basis of 40% OSD is Gross Sales
Q4: Assuming the partnership is a general partnership, how much is taxable income of
Buladaco?

Gross income- Buladaco 500,000

OPEx (200,000)
Taxable net income 300,000