INCOME TAXATION

Income Taxes of Partnerships,

Co-ownerships and Joint Ventures

Prof. Jenny Malabrigo

Taxation of Partnerships
- In general, partnerships are considered
corporations and taxable as such at 30% on
taxable income.
- The following are exempt from income tax:
a. General professional partnerships
b. Joint venture or consortium formed for
undertaking construction projects
c. Joint venture or consortium engaged in
petroleum, coal, geothermal and other
energy operations

Partnership

A partnership is defined as a
contract whereby two or more
persons bind themselves to contribute
money, property or industry to a
common fund to engage in profitable
activities with the intention of dividing
the profits among themselves.

Classification of Partnership
1.

General Professional Partnership

(GPP)

2.

General Co-Partnership (GCP)

General
Professional
Partnership
(GPP)

General Professional Partnership (GPP)

A GPP is one formed by two or several
persons for the sole purpose of exercising
their common profession of which no part
of income is derived from engaging in any
trade or business. A GPP is exempt from
income tax but required to file a tax return.
Ex. CPA Firms, Law Firms, Medical
Partnerships, etc..

Guidelines to be followed for

GPP
1.

2.

The partners in a general professional partnership

shall be liable for income tax only in their separate
and individual capacities.
Each partner shall report his distributive share,
actually or constructively received in the net income
of the partnership as gross income. The share of a
partners shall be subject to 10% creditable
withholding tax.
If the income payments to the partner for the
current year exceeds P720,000, the withholding tax
is 15%.

Guidelines to be followed for

GPP
3.

The partner is deemed to have elected the itemized

deductions unless he declares his distributive share
undiminished by his share of the itemized deductions.
A forty percent (40%) OSD is deductible from the
distributive share of the gross income if such gross
income was not previously reduced by the
partnerhsips itemized deduction.

4. For purposes of computing the distributive share of

the partners, the net income of the partnership shall
be computed in the same manner as that of a
corporation.

Illustration
Atty. Liu is one of the partners of B&J Partnership. The
partnership is engaged in rendering professional
services (the sole source of income of the
partnership) with a net income before tax of
P200,000. Atty. Liu has 60% shares on the profit or
loss of the partnership. The other income of Atty. Liu
is a buy and sell business with a gross income of
P200,000 and related expenses of P80,000.
Compute the following:
1. How much is the income tax of B&J?
2. How much is the net income tax payable of Atty. Liu
if the partnership withheld a 10% withholding
income tax.

Illustration
Atty. Liu is one of the partners of B&J Partnership. The partnership is
engaged in rendering professional services (the sole source of income
of the partnership) with a net income before tax of P200,000. Atty. Liu
has 60% shares on the profit or loss of the partnership. The other
income of Atty. Liu is a buy and sell business with a gross income of
P200,000 and related expenses of P80,000.

Answers:
1.
How much is the income tax of B&J?
B&J Partnerships income is tax-exempt because it is engaged in purely
professional services.
How much is the net income tax payable of Atty. Liu if the
partnership withheld a 10% withholding income tax?
Atty. Liu, being engaged in business, is liable for income tax only in his
separate and individual capacity and should not in any way change
the tax status of B&J partnership as a general professional
partnership.
2.

Illustration
Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership)
with a net income before tax of P200,000. Atty. Liu has 60% shares on the
profit or loss of the partnership. The other income of Atty. Liu is a buy and sell
business with a gross income of P200,000 and related expenses of P80,000.

Answers:
The income tax due of Atty. Liu would be:
Share from the gross income of professional partnership
Gross income from buy and sell business
___________
Less: Allowable deductions ___________ ___________
Income before personal exemptions ___________
Less: Personal exemption basic
___________
Taxable Income
___________
Tax on P140,000
___________
Tax on excess (P50,000 x ____)
___________
Income tax due
___________
Less: Tax withheld by the partnership (P120,000x____)
Income tax still due ___________

___________

___________

Illustration
Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership)
with a net income before tax of P200,000. Atty. Liu has 60% shares on the
profit or loss of the partnership. The other income of Atty. Liu is a buy and sell
business with a gross income of P200,000 and related expenses of P80,000.

Answers:
The income tax due of Atty. Liu would be:
Share from the gross income of professional partnership
(P200,000 x60%) P 120,000
Gross income from buy and sell business
P200,000
Less: Allowable deductions
80,000
120,000
Income before personal exemptions P240,000
Less: Personal exemption basic
50,000
Taxable Income P190,000
Tax on P140,000
22,500
Tax on excess (P50,000 x 25%)
12,500
Income tax due P35,000
Less: Tax withheld by the partnership (P120,000x10%)
Income tax still due
P23,000

12,000

Notes:
1.

2.

3.

The Tax Code (RA 8424) provides that the partners

distributive share from the neti income of the general
professional partnership be included as a part of
individual taxpayers gross income.
P.D. 1773 allows OSD if the reported income of the
indivudal partner as share form the general professional
partnership is not previously reduced by the
partnerships business expenses.
If the share received by an individual taxpayer from a
professional partnership is based on net income of the
partnership (gross income minus allowable itemized
deductions), it shall no longer be allowed to deduct 40%
OSD; otherwise, there will be a double deduction.

General
Co-Partnership
(GCP)

General Co-Partnership (GCP)

A GCP (compania-colectiva) is a partnership wherein part or all
of its income is derived from the conduct of trade or business.
For taxation purposes, the general co-partnership is considered
as a corporation and therefore liable to corporate tax of 30%.
A general commercial partnership is also subject to MICIT in
the same manner as a corporation.
In a commercial partnership, the partners are considered as
stockholders. The profits distributed to them by the
partnership are considered dividends and subject to a final
tax of 10%.

Illustration

J and B are partners of JBs Enterprises,

sharing 60% and 40% profit and loss,
respectively. The partnerships net
income before tax during the year
amounts to P2,000,000.

Determine the following:

1. Income tax due of JBs Enterprises.
2. Final income taxes on the share of J and
B partners.

Illustration

J and B are partners of JBs Enterprises, sharing 60% and 40%

profit and loss, respectively. The partnerships net income before
tax during the year amounts to P2,000,000.

Answers:
1. Income tax due of JBs Enterprises.
Net income ___________
Multiplied by corporate normal tax rate
Income tax Due
___________

___________

Final income taxes on the share of J and B partners.

Net income after tax (P2,000,000-P600,000)
___________
Partner A Partner B
Distribution of net income
___________ ___________
2.

Multiplied by final tax rates ___________ ___________

Final income taxes
___________ ___________

Illustration
J and B are partners of JBs Enterprises, sharing 60% and 40% profit
and loss, respectively. The partnerships net income before tax
during the year amounts to P2,000,000.
Answers:
1. Income tax due of JBs Enterprises.
Net income P2,000,000
Multiplied by corporate normal tax rate
Income tax Due
P600,000

30%

Final income taxes on the share of J and B partners.

Net income after tax (P2,000,000-P600,000)
P1,400,000
2.

Distribution of net income Partner A Partner B

P840,000(60%) P560,000 (40%)
Multiplied by final tax rates 10%
10%
Final income taxes
P 84,000 P56,000

General Professional Partnership

Engaged in Commercial Activity
To be nontaxable, a GPP should be for the sole
purpose of exercising the partners common
profession.
If the GPP is engaged in trade or business other than
the practice of the partners common profession ,
GPP becomes taxable as a corporation.
A taxable partnership is subject to regular corporate
income tax ( 30% based on the net taxable
income) or minimum corporate income tax (2%
based on the gross income) starting from the 4 th
year of its business operation.

Illustration
JB Partnership of James and Benjie reported
the following earnings:
Professional fee
P100,000
Professional expenses
60,000
Business income trading
200,000
Business expenses trading
120,000

Question: Will JB partnership be liable to

income tax?

Illustration
JB Partnership of James and Benjie reported the following
earnings:
Professional fee P100,000
Professional expenses
60,000
Business income trading
200,000
Business expenses trading
120,000
Question: Will JB partnership be liable to income tax?
Answer: JB partnership is liable to pay income tax, because it
earned business income. It is a clear indication that the
partnership is engaged in activities other than professional
services. Hence, it is considered and treated as a
corporation which is liable to corporate income tax of 30% or
MCIT.

The income tax payable of JB Partnership would be:

Revenues:
Professional fee P________
Business income trading
________ ________
Expenses:
Professional P________
Business trading
________ ________
Net taxable income P ________
Multiplied by corporate income tax rate ________
Income tax due P ________

The income tax payable of JB Partnership would be:

Revenues:
Professional fee P100,000
Business income trading
200,000P300,000
Expenses:
Professional P 60,000
Business trading
120,000
180,000
Net taxable income P120,000
Multiplied by corporate income tax rate
30%
Income tax due P 36,000

Assume that the partners agreed to divide the net

income equally, the tax pertinent to the shares of
James and Benjie would be:
Net income before income taxes P________
Less: Income tax ________
Net Income for distribution P________
James
Benjie
Profit distribution P_____ P______
Multiplied by tax for dividends ______
Final tax withheld by the partnership

_______
_______

_______

Assume that the partners agreed to divide the net

income equally, the tax pertinent to the shares of
James and Benjie would be:
Net income before income taxes P120,000
Less: Income tax
36,000
Net Income for distribution P 84,000
James Benjie
Profit distribution P42,000 P42,000
Multiplied by tax for dividends 10%
10%
Final tax withheld by the partnership P4,200

4,200

It must be observed that the taxable

income of the co-partnership , less
corporate income tax, shall be taxable to
partners, whether actually distributed or
not.

Co-ownership

When more than one person acquired the right to

own a piece of property or mass of properties, a coownership exists. The ownership acquisition by
more than one person over a property or properties
may be due to succession of an estate or donation.
Co-ownership is generally tax-exempt because the
activities of the co-owners are usually intended to
preserve the property and to collect the income from
the property.
The income derived by a co-owner from the property
shall be reported in his individual tax returned
regardless of whether such income is actually or
constructively received.

When Co-ownership is Subject to Income tax

When a co-ownership is formed or established
voluntarily, or upon agreement of the parties.
When the individual co-owner reinvested his hsare in
the co-ownership to produce another incomegenerating activity.
Where the inherited property remained undivided for
more than ten years, and no attempt was ever made
to divide the same among the co-heirs, nor was the
property under administration proceedings nor held in
trust, the property should be considered as owned by
an unregistered partnership.

Joint Venture

Joint venture, in the Philippines, is a business activity that is

organized or established only for a temporary or shortperiod of time. It is dissolve once its business objective is
accomplished.
An example of joint venture is the undertaking of a
construction project by which when the project is
completed, the joint venture is also terminated.
Generally, joint venture is one of the options used by
corporations domestic or foreign-based which are not
allowed to form partnership or beocme partners in a
partnership to engage into a particular business
undertaking. It is because, under the Philippine Law, only
individual, natural persons are permitted to form
partnerships.

Income Tax of Joint

Ventures
An unincorporated joint venture is taxed like a
corporation. The share of the joint venture partners
will no longer be taxable to them because they partake
of dividends if paid to a domestic or resident
corporation.
However, an unincorporated joint venture formed for the
purpose of undertaking a construction project or
engaging in petroleum operations pursuant to the
consortium agreement with the Philippine Government
is not subject to the corporate income tax. Only the
joint venture partners will be taxed on their respective
shares in the income of the joint ventures.

QUIZ
J and B are partners of JBs Enterprises, sharing 60% and
40% profit and loss, respectively. The partnerships net
income before tax during the year amounts to
P4,000,000.

1. What is the income tax due of JBs Enterprises?

2. What is the final income taxes on the share of J?

3. What is the final income taxes on the share of B?

4. What is the absolute exemption allowed to estates and
trusts?