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taxation of partnerships and partners
Transcript of taxation of partnerships and 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