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Partnerships: Less Than or Equal To Php720,000 10%

Partnerships are defined as a contract between two or more persons to contribute money, property, or industry into a common fund, with the intention of dividing the profits among themselves. There are two types of partnerships for tax purposes: general partnerships (GP) and general professional partnerships (GPP). While GPs are taxed like corporations, GPPs are exempt from income tax on ordinary income but partners are still subject to final withholding taxes on income payments. In computing taxable income, partnerships can deduct allowable expenses either through itemized deductions or an optional standard deduction of 40% of gross income.

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83 views5 pages

Partnerships: Less Than or Equal To Php720,000 10%

Partnerships are defined as a contract between two or more persons to contribute money, property, or industry into a common fund, with the intention of dividing the profits among themselves. There are two types of partnerships for tax purposes: general partnerships (GP) and general professional partnerships (GPP). While GPs are taxed like corporations, GPPs are exempt from income tax on ordinary income but partners are still subject to final withholding taxes on income payments. In computing taxable income, partnerships can deduct allowable expenses either through itemized deductions or an optional standard deduction of 40% of gross income.

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Partnerships

Article 1767 of the Civil Code of the Philippines defines Partnership as contract wherein
two or more persons bind themselves to contribute money, property, or industry into a
common fund, with the intention of dividing the profits among themselves. Two or more
persons may also form partnership for the exercise of profession.
Though partnership is different from a corporation in so many ways, a partnership is like
a corporation such that it acquires a juridical personality separate and distinct from the
partners. Also, under the tax code, a partnership is generally taxed as a corporation.
 
There are two types of partnership for tax purposes:

 
Note that the exemption of GPPs to tax is only on its ordinary income (income subject to
income tax) and does not include passive income subject to final tax and transactions
subject to capital gains tax.
Actual income payments made by a GPP to the partners such as drawings, advances,
profit share, allowances and stipends are subject to CWT as follows:

Total Income Payment Tax Rate


Less than or equal to Php720,000 10%
More than Php720,000 15%
 
Though a GP and GPP is treated differently for income tax purposes, for both
partnership types, the computation of taxable income for GP and net income for GPP is
in the same manner as a corporation.
The formula to compute for taxable income of a partnership is
General Partnership:

Gross Income Php xx.xx


Less: Allowable Deductions        (xx.xx)
Taxable Income Php xx.xx
Less: Income Tax Due (30%)      (xx.xx)
Net Income after Tax Php xx.xx
Add: Other Income subject to Final Tax        xx.xx
Total Distributable income of Partnership Php xx.xx
Divide: Number of Partners              x
Distributive Share of Each Partner Php xx.xx
 
General Partner

Distributive Share of Each Partner Php xx.xx


Final Tax on Dividend              10%
Final Withholding Tax of Partner Php xx.xx
 
General Professional Partnership:

Gross Income Php xx.xx


      
Less: Allowable Deductions
(xx.xx)
Net Income Php xx.xx
Divide: Number of Partners              x
Distributive Share of Each Partner –
Php xx.xx
Ordinary Income
 
Other Income subject to Final Tax        xx.xx
Total Distributable income of Partnership Php xx.xx
Divide: Number of Partners              x
Distributive Share of Each Partner –
Php xx.xx
Passive Income
 
General Professional Partner

Distributive Share of Each Partner – Ordinary


Php xx.xx
Income
Distributive Share of Each Partner – Passive
       xx.xx
Income
Total Distributive Share of Partner Php xx.xx
 

Gross Income Php xx.xx


Less: Allowable Deductions        (xx.xx)
Net Business Income Php xx.xx
Add: Distributive Share of Each Partner –
     xx.xx
Ordinary Income
Add: Compensation Income  
Taxable Income Php xx.xx
 

Income Tax Due (NI*Graduated Tax Rate per Table Php


1.1) xx.xx
Less: Creditable withholding Taxes  
         Creditable withholding taxes on xx.x
 
compensation x
xx.x
         Prior years excess credit  
x
xx.x
         Tax Payments for the Previous Quarter  
x
         Tax Withheld at Source xx.x  
x
xx.x
           Foreign Income Tax Credit (xx.xx)
x
Php
Income Tax Payable
xx.xx
 
Allowable Deductions
In computing for the net income of GPP or the taxable income of a GP, the partnership
can recognize and deduct expenses. There are two categories allowed for deductions
from gross income under the Sec 31 of the Tax Code.
Itemized Deductions pertain to the itemized expenses which are ordinary and
necessary, incurred and paid in fulfillment of the purpose for which the partnership was
created.
Optional Standard Deduction is the allowed deduction for expenses at 40% of gross
income in lieu of all the itemized expense.
 
Rule on Allowable Deductions for GPP
Rule 1: If the GPP availed of the itemized deduction in computing its net income, the
partners may still claim itemized deductions from said share, provided that, in claiming
the itemized deductions, the partner is precluded from claiming the same expenses
already claimed by the GPP.
Rule 2: If the GPP availed of the itemized deductions, the partners are not allowed to
claim OSD from  their share in the net income because the OSD is a proxy for all the
items of deductions allowed  in arriving at taxable income.
Rule 3: RR 8 -2018, however, provides that though the partner can no longer deduct
expenses already claimed in the computation of the distributed share from the
partnership in his ITR, he can still use either itemized deduction or OSD for income
other than share from the GPP
Rule 4: The GPP partner can no longer opt to be taxed at the 8% preferential tax rate
since the share from the GPP’s net income is already net of expense. Remember that
the 8% preferential tax rate should be based on gross sales/ receipts of the individual.
 

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