TAXATION FOR PARTNERSHIPS

Question 1

What is a partnership?

Answer 1

Partnership is a contract whereby two or more persons bind themselves to contribute money/property/industry to a common fund with the intention of dividing the profits among themselves. It has a juridical personality separate and distinct from that of each of the partners.

Question 2

What are the kinds of partnerships? How is each type subjected to income tax?

Answer 2

1. General Professional Partnerships - Those formed for the practice of profession.

GPPs are not subject to income tax and consequently to CWT (15% if more than 720,000 and 10% if otherwise.), but is REQUIRED TO FILE AN ITR for the purpose of furnishing information as to the share of each partner in the net income of the GPP, WHICH EACH PARTNER SHALL INCLUDE IN HIS INDIVIDUAL ITR.

GPPs are subject to FWT and CGT.

2. Taxable Partnerships - partnerships other than GPPs which are considered corporation for income tax purposes and therefore subject to income tax at 30% (TRAIN) OR 25%/20% (CREATE) of net taxable income. Their partners are considered shareholders, and their share of profits distributed to them are subject to FWT.

Question 3

T or F
Partnerships other than GPPs are also subject to the rules on Improperly Accumulated Earnings Tax, since they are treated as corporations for income tax purposes.

Answer 3

False. Partnerships do not have retained earnings.

Question 4

T or F
Corporations may form a taxable partnership.

Answer 4

False, since corporations and other juridical persons cannot form partnerships because they cannot give consent. They can, however, form joint ventures.

Question 5

Explain the Optional Standard Deductions for Partnerships.

Answer 5

OSD can be claimed IN LIEU OF ITEMIZED DEDUCITIONS.

The OSD is 40% OF GROSS INCOME.

Taxpayer must choose OSD in the 1st quarterly return and must be consistent for the whole year.

Under TRAIN law, GPPs and partners may choose between itemized or OSD.

Question 6

T or F
Income of the GPP already subjected to FWT or CGT are returnable (included) in the partners ITR.

Answer 6

False.

Question 7

ABC Partnership, general partnership, reported a net profit from sales amounting to 800,000. Other income included 8,000 from interest income from bank deposit net of 20% FWT, and dividend income from another domestic corporation of 20,000 (intercompany dividend -exempt). Assuming the 2 partners of ABC partnership shared profits equally, how much is the FWT on the distributive share of the partnership?

Answer 7

800,000 x 70% (RCIT) = 560,000
560,000 + 8,000 interest income + 20,000 dividend = 588,000 x 10% = 58,800 FWT on dividends to both partners. 58,800 / 2 partners = 29,400 per partner