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taxation of partnerships and partners

chapter 6 income tax report
by

sophia roa

on 6 January 2013

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Transcript of taxation of partnerships and partners

it is important to note that the above withholding tax on income payments by GPPs to its partners is in the nature of creditable withholding taxes (CWT). Under the creditable withholding tax system, the amounts withheld therein are merely intended to equal or at least approximate the tax due on the item of income. The payee – partner is still required to file an income tax return to report the income and pay the difference between the tax withheld and the tax due, if any. CWTs are different from final withholding taxes (FWT). Under the final withholding tax system, the amount withheld constitutes full and final payment of the income tax due on the transaction. Furthermore, the liability for payment of the tax due rests primarily on the payor as the withholding agent and that payee is not required to file an income tax return for this particular income item. Creditable Withholding Taxes illustration if the GPP availed of the ITEMIZED DEDUCTION in computing its net income, the partners MAY STILL CLAIM itemized deductions from said share Itemized Deductions or Optional Standard Deductions for GPPs CO-OWNERSHIP Under Section 26 of the Tax Code, as amended, a general professional partnership as such shall not be subject to income tax. However, persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. GPP Partnership (other than GPPs), whether registered or not, are considered as corporations and therefore are also taxed as corporation. Consequently, the partners are considered as stockholders. FORMEDBY PERSONS FOR THE SOLE PURPOSE OF EXERCISING THEIR COMMON PROFESSION, NO PART OF THE INCOME OF WHICH IS DERIVED FROM ENGAGING IN TRADE OR BUSINESS GENERAL PROFESSIONAL PARTNERSHIPS GENERAL CO-PARTNERSHIP CLASSIFICATION OF GENERAL PARTNERSHIPS IN TAXATION TAXATION OF PARTNERSHIPS AND PARTNERS WITH the issuance of Revenue Memorandum Circular (RMC) No. 03-2012, the Bureau of Internal Revenue issued the following clarifications on the tax liability of general professional partnerships (GPPs) and their partners.

1) Income tax liability of GPPs and partners - A GPP is not subject to income tax. It is the partners who are liable to income tax on their separate and individual capacities. For income tax purposes, each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

2) Creditable withholding tax on GPPs and partners - Since a GPP is not subject to income tax, it is exempt from withholding tax prescribed in Revenue Regulations No. 2-98 on income payments it receives in consideration for its professional services.

However, income payments made periodically or at the end of the taxable year by a GPP to its partners, such as drawings, advances, sharings, allowances, stipends and the like, are subject to the 15 percent creditable withholding tax if payments to the partner exceed P720,000, and 10 percent if otherwise. shall not be subject to income tax if the activities of the co-owners are limited to the preservation of property and the collection of the income therefrom Illustrative problem A GENERAL PARTNERSHIP WHICH IS NOT A GENERAL PROFESSIONAL PARTNERSHIP A CONTRACT WHERE THE PARTNERS AGREE TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY WITH THE INTENTION OF DIVIDING THE PROFITS AMONG THEMSELVES This business arrangement is common among lawyers, accountants, architects and engineers. Their standard investment is their talent or skills, and they are generally paid based on the amount of time they spend in attending to their client’s needs and the end result of their work. Payments made by clients to GPPs for their professional services are likewise not subject to these taxes GPPs, unlike corporations, are not separate taxable entities. GPPs are pass-through entities, that’s why it’s the partners that shoulder the income taxes. The BIR recognizes that GPPs are primarily formed because of the need to pool resources. Accordingly, general professional partnerships are exempt from the withholding tax per Revenue Regulations No. 2-98. It is therefore the individual partners who shall be subject to income tax and consequently, to the withholding tax, in their separate and individual capacities. C, single is a partner in GR partnership, a taxable partnership. Eugene for himself, derives income from his profession as an architect. It is agreed upon that partner C is to receive 75% in the P/L of GR while partner A, 25%. With the following pertinent data, compute for the tax due on C’s share in the net income of the partnership and on his professional income for the taxable year 2012. Gross income of GR 1,000,000
Gross Income of Jerome from Profession 300,000
Income Tax withheld on Professional Income 30,000
Expenses of GR 300,000
Expenses of Jerome in Profession 80,000 Data Solution if the GPP avails of OSD in computing its net income, the partners comprising it can NO LONGER CLAIM further deduction from their share in the said net income the type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners for the taxable year 2012, Noy and Nay, partners of a GPP agreed to divide profits and losses 50:50, respectively. both are married without qualified dependents. Under Sec. 2.57.2(H), the GPP is constituted as the withholding agent of the creditable withholding tax therein. The failure to withhold on this particular item will not result to deficiency income tax, but to deficiency withholding tax. Final Tax: Partner Jerome Income Tax Liability
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