TAXATION OF PARTNERSHIPS AND PARTNERS

Classification of General Partnerships in Taxation

In a contract of partnership, the partners agree to contribute money, property or industry to a common fund
with the intention of dividing the profits among themselves.

1. General professional partnership. One formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or business.

 A GPP is a partnership formed for the exercise of common profession. All partners must belong to the same
profession.
 A GPP is not treated as a corporation and is not a taxable entity. It is exempt from income tax, but the
partners are taxable in their individual capacity with respect to their share in the income of the partnership.
 The partnership is not allowed to engage in any trade or business
 The income derived by the partnership should only be from their practice of common profession

2. General co-partnership (compania colectiva). A general partnership which is not a general professional
partnership.
A general professional partnership (GPP) shall not be subject to the income tax but is required to file annual
income tax return/annual information return for the purpose of furnishing information as to the items of
gross income, deductions, and the names, TINs, addresses and share of each of the partners. Partners in a
general professional partnership shall be liable for income tax in their separate and individual capacities.

Section 26 of the NIRC provides that – “For purposes of computing the distributive share of the partners,
the net income of the GPP shall be computed in the same manner as a corporations.” As such, a GPP may
claim either the allowed itemized deductions or the optional standard deduction (OSD) allowed to
corporation in claiming the deductions in an amount not exceeding forty percent (40%) or its gross income
similar to the OSD allowed for corporations.

The net income determined by either claiming the itemized deduction or OSD from the GPP’s gross income
is the distributable net income from which the share of each partner is to be determined. Each partner
shall report as gross income his distributive share, actually or constructively received, in the net income of
the partnership.

GPPs, unlike corporations and general co-partnerships, do not pay national income taxes. Rather, the GPP
serves as a “conduit” or “pass-through” entity where its income is ultimately taxed to the partners
comprising it.
 GPP

Gross Receipts P 2,000,000

Less Cost of Service 600,000
Gross Income 1,400,000
Less Deductions (Options)
a. Allowable itemized
b. OSD 560,000
Income for distribution to partners P 840,000

Individual Level
Share in Net income of GPP P 420,000
Tax due ( Sec. 24 A) 35,000
8% option is not applicable

Partners in GPP cannot claim OSD against their share in net income. The share in the net income of the
GPP is not gross receipts but rather a gross income. Under RR 8 – 2018, a partner can no longer claim
deductions from their share in GPP net income
Illus tra tion #1
Mr. Tiu is a pa rtne r of J RT & Co., a ge ne ra l profe s s iona l pa rtne rs hip, a nd owns 25% inte re s t. The
gros s re ce ipts of J RT & Co. a mounte d to P 10,000,000 for ta xa ble ye a r 2018. The re corde d cos t
of s e rvice a nd ope ra ting e xpe ns e s of J RT & Co. we re P 2,750,000 a nd P 1,500,000 re s pe ctive ly.

If J RT & Co. a va ile d of the OS D, the de ductions a nd ne t income s ha ll be compute d a s follows :

Gros s Re ce ipts P 10,000,000

Le s s : Cos t of S e rvice s 2,750,000
Gros s Income P 7,250,000
Le s s : OS D (P 7,250,000 x 40%) 2,900,000
Ne t Income for Dis tribution to P a rtne rs P 4,350,000

 The re is no income ta x lia bility for J RT & Co. s ince it is a ge ne ra l profe s s iona l pa rtne rs hip
unde r S e ction 26 of the Ta x Code , a s a me nde d.
 The GP P e le cte d OS D in the computa tion of its ne t income a nd its e le ction is irre voca ble
for the ta xa ble ye a r for which the re turn is ma de .
 The GP P is lia ble to bus ine s s ta x.
 Share in Distributive Profit (P4,350,000 x 25%) P1,087,500
Tax due:
On P800,000 P130,000
On excess (P1,087,500 -P800,000) x 30% 86,250
Total Tax Due P216,250

•Individual partner is not allowed to claim further deduction from his distributive share since this
is already net of cost and expenses.

•Individual partner is not allowed to avail of the 8% income tax rate option since their
distributive share from GPP is already net of cost and expenses.
If J RT & Co. a va ile d of the ite mize d de duction, the de ductions a nd ne t income s ha ll be compute d
a s follows :
The Ne t Income of J RT & Co. will be compute d a s follows :

Gros s Re ce ipt P 10,000,000

Le s s : Cos t of S e rvice s 2,750,000
Gros s Income P 7,250,000
Le s s : Ope ra ting Expe ns e s 1,500,000
Ne t income for Dis tribution to P a rtne rs P 5,750,000

 The re is no income ta x lia bility for J RT & Co. be ing a ge ne ra l profe s s iona l pa rtne rs hip
unde r S e ction 26 of the Ta x Code , a s a me nde d.
 The GP P e le cte d ite mize d de duction in the computa tion of its ne t income a nd its e le ction
is irre voca ble for the ta xa ble ye a r for which the re turn is ma de .
 The GP P is lia ble to bus ine s s ta x.
The income ta x lia bility of Mr. Tiu will be compute d a s follows :

S ha re in Dis tributive P rofit (P 5,750,000 x 25%) P 1,437,500

Ta x Due :
On P 800,000 P 130,000
On Exce s s (P 1,437,500 – P 800,000) x 30% 191,250
Income ta x due P 321,250

 Individua l P a rtne r is not a llowe d a ny de duction on his dis tributive s ha re s ince this is
a lre a dy ne t of cos t a nd e xpe ns e s .
 Ta xpa ye r is not a llowe d to a va il of the 8% income ta x ra te option s ince he r dis tributive
s ha re from GP P is a lre a dy ne t of cos t a nd e xpe ns e s .
Illu s tra tion #2
For the ta xa ble ye a r 20 18 , Tim a nd Tom, pa rtne rs o f ge ne ra l profe s s iona l pa rtne rs hip a gre e d to
divide profits a nd los s e s 50:50, re s pe ctive ly. Both a re ma rrie d without qua lifie d de pe nde d.
The following a re the de ta ils of the a ccounts :

S a le s of S e rvice s , GP P P 2,500,000
Cos t of s a le s , GP P 875,000
Ite mize d De ductions , GP P 825,000

P a rtne r Tim P a rtne r Tom

Tra ve lling Expe ns e s (not liquida te d by the GP P ) P 34,500 P 16,500
Re pre s e nta tion Expe ns e s (pe rs ona l cre dit ca rd of 14,250 23,500
P a rtne r us e d
Cos t of Ca r, to be de pre cia te d ove r 5yrs , ( us e d in the 750,000 580,000
pra ctice , re gis te re d unde r the P a rtne r
S a la rie s from the GP P 360,000 300,000
Lotto winnings 900,000
Inte re s t on Ba nk De pos its 25,000 20,000
Book Roya ltie s 250,000
The dis tributa ble ne t income of the GP P , s ha re of e a ch pa rtne r a nd ta xa ble income a re compute d
a s follows :

GP P If OS D GP P if Ite mize d
S a le of S e rvice s P 2,500,000 P 2,500,000
Le s s : Cos t of S e rvice s 875,000 875,000
Gros s income P 1,625,000 P 1,625,000
Le s s : De ductions
40% Optiona l S ta nda rd De ductions or 650,000
Ite mize d De ductions 825,000
Dis tributa ble Ne t Income P 975,000 P 800,000

S ha re of Ea ch P a rtne r (50 -50) P 487,500 P 400,000

GP P GP P
If OS D, the n- If Ite mize d, the n
P a rtne r P a rtne r P a rtne r Tim P a rtne r Tom
Tim -OS D Tom OS D Ite mize d Ite mize d
S ha re of Ea ch P a rtne r in the GP P P 487,500 P 487,500 P 400,000 P 400,000
(50:50)
Add: S a la rie s from the GP P 360,000 300,000 360,000 300,000
Ta xa ble income P 847,500 P 787,500 P 561,250 P 544,000
•Lotto winnings and interest on bank deposits are subject to 20% final tax while book royalties to a 10% final tax, hence excluded in the computation of the partner’s taxable
Taxation of General Co-Partnerships  

Partnerships (other than GPPs), whether registered or not, are considered as corporations and are
therefore taxed as corporations. Consequently, the partners are considered as stockholders and therefore,
profits distributed to them by the partnership are considered as dividends. The share of an individual
partners in a taxable partnership is subject to a final tax of 6% in 1998, 8% in 1999 and 10% in 2000.
 
The distributive share of a partner in the net income of a partnership is equal to each partner’s
distributive share of the net income declared by the partnership for a taxable year after deducting the
corresponding corporate income tax. Such share shall be included in the individual returns of the
partners, whether actually distributed or not. The taxable income declared by the partnership for a taxable
year shall be deemed to have been actually or constructively received by the partners in the same taxable
year.
 
Illus tra tion:
J e rome , s ingle is a pa rtne r in J RS P a rtne rs hip, a taxa ble pa rtne rs hip. Je rome for hims e lf, de rives
income from his profes s ion a s a n a rchitect. It is a gre ed upon tha t Pa rtne r Je rome is to re ce ive
75% s ha re in the profit a nd loss of J RS while P a rtne r Ange la , 25%. With the following pe rtine nt
da ta , compute for the ta x due on Je rome ’s sha re in the ne t income of the pa rtne rs hip a nd on his
profe ss iona l income for the ta xable ye a r 2018.

Gros s income of J RS P 3,000,000

Gros s income of J e rome from P rofe ss ion 890,000
Income Tax withhe ld on P rofes s iona l Income 40,000
Expe ns e s of J RS 1,800,000
Expe ns e s of J e rome in P rofe ss ion 430,000
JRS Partnership
Gross income of JRS P 3,000,000
Expenses of JRS 1,800,000
Net Income before tax 1,200,000
Less: Income tax (1,200,000 X 30%) 360,000
Net Income after tax P 840,000

Partner Jerome
Final Tax:
Share of Jerome in JRS (840,000 x 75%) P 630,000
Multiply by Tax rate 10%
P 63,000

Income Tax Liability ( Sec. 24A)

Gross Income from Profession P 890,000
Less; Expenses 430,000
Net Income P 460,000

Tax Due
On 400,000 P 30,000
60,000 at 25% 15,000
Total P 45,000
Less: Tax withheld 40,000
Tax still payable P 5,000