9/29/2017

TAX ON PARTNERSHIPS,
ESTATES AND TRUSTS
TAX I INCOME TAXATION
CEDRIC VAL R. NARANJO, CPA

CLASSIFICATION OF PARTNERSHIPS
BASED ON TAXATION
GENERAL PROFESSIONAL PARTNERSHIP
Formed for the purpose of exercising the partner common
profession, and no part of income of which is derived from engaging
in any trade or business.

GENERAL CO-PARTNERSHIP
created for the purpose of obtaining profits from the conduct of
trade or business.

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GENERAL PROFESSIONAL PARTNERSHIP

GPP is NOT taxable entity since it acts only as a PASS

THROUGH entity where its income is finally taxed to the
partners comprising it.

GENERAL PROFESSIONAL PARTNERSHIP

The NET INCOME of GPP, for purposes of computing the
distributive share of the partners, shall be computed in the
same manner as a corporation.
GPP may use either the itemized deductions, or, in lieu of
thereof, it can opt for the OSD.
The net income determined by either using the itemized
deductions or OSD represents the DISTRIBUTIVE NET INCOME
from which the share of each partner is to be determined.

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GENERAL PROFESSIONAL PARTNERSHIP

TAX LIABILITY
Each partner shall report as gross income his/her distributive
share, actually or constructively received, in the net income of
the partnership.
The partners in a GPP shall be liable for income tax only in
their separate and individual capacities.
On the partners distributive share in GPP, the individual
partner can still claim the deductions incurred or paid by
him/her subject to the following conditions:

GENERAL PROFESSIONAL PARTNERSHIP

TAX LIABILITY
If the GPP uses the itemized deductions
Partners may still claim itemized deductions from partnership share.
However, they are precluded from claiming the same expenses
already claimed by the GPP.
Partners are not allowed to claim OSD from their share in the net
income of GPP.
If the GPP uses the OSD
Partners can no longer claim further deduction from their share in
the net income of the GPP.

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GENERAL PROFESSIONAL PARTNERSHIP

TAX LIABILITY
The method of deductions on other gross income of the
partner derived from trade, business or practice of profession
would follow the same deduction availed of from GPPs
distributive income.
The distributive share of the partners in a GPP shall be subject
to creditable withholding tax based on the following rates:
10% - Share in the net income of P720,000 or less
15% - Share in the net income of P720,000

ILLUSTRATION 1
Carlos and Dante were partners in CD & Co., a general professional
partnership, and shared profit and losses in the ratio of 40% and 60%,
respectively. The GPP presented the following data for the year:
Gross Income P 1,000,000
Operating expenses 600,000
Charitable Contributions
subject to limitation 50,000

REQUIRED: Determine the following:

1. Tax liability of the partnership
2. Distributive share of each partner under the following
assumptions:
a. The GPP avails the itemized deductions.
b. The GPP avails the OSD

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Aliyah and Reihannah, both married and are CPAs, formed a GPP during the
current taxable year to render consultancy services to the public. The partners
share profits and losses equally. The result of the partnerships operation showed
the following data:
Gross receipts from clients P1,500,000
Cost of service 700,000
Business expenses 360,000
Additional information:
a. Aliyah, married with three qualified dependent children has other income
derived from business as follows:
Gross Sales P 480,000
Cost of Sales 220,000
Operating expenses 80,000
b. Traveling expenses incurred by the partners related to GPPs operation, which
were neither claimed by the GPP as deduction nor liquidated by the partnership:
Aliyah 18,000
Reihannah 14,000
c. Reihannah, married with five qualified dependents, received compensation
income of P280,000 as part time college professor.

GENERAL CO-PARTNERSHIP TAX

LIABILITY
A general co-partnership is taxable on its income like a
corporation.

The share of a partner in a general co-partnership subject to

tax is treated like a dividend, that is, the share is also subject
to 10% final tax.

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ILLUSTRATION 3
Ms. Francisca and Mr. Bob, both self-employed and married, decided to form
a partnership for the purpose of buying and selling fresh mangoes. During
the 2013 taxable year, they presented the result of the partnership operation
as follows:
Gross income P 1,800,000
Itemized allowable deductions 1,450,000

The results of their individual business operations are as follows:

Ms. Francisca Mr. Bob

Gross Income 800,000 1,200,000

Allowable Expensess 550,000 970,000

Ms. Francisca and Mr. Bob have six and two qualified dependent children,
respectively. Both taxpayers claim the additional exemptions. In their
partnership, they divide profits and losses in the ratio of 45:55.

REQUIRED: Compute the net taxable income of both taxpayers subject to

basic and final tax.

ESTATE
Refers to the total value of all assets and liabilities left by an
individual death.

QUERY: WHO IS LIABLE OF INCOME TAX OF THE ESTATE FROM

THE DEATH OF THE DECEDENT UNTIL THE HEIRS RECEIVE THE
PROPERTY?

ANSWER: The estate, and it is treated as a person with

juridical personality.

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ESTATES BASIC GUIDELINES

The gross taxable income of the estate include all
the items composing the gross income of an
individual taxpayer.
The deductible items from the income of the estate
shall be made up of similar deductions allowable to
an individual taxpayer.
A special deduction is allowed to the estate on the
amount of income credited or paid to the heirs or
beneficiaries, which has been subject to 15%
creditable withholding tax.

ESTATES BASIC GUIDELINES

When a portion of the gross estate has been paid or
transferred to the heir, the amount so transferred is
not allowable deduction from the income of the
estate.
The estate shall be allowed to deduct from the
income an exemption of P20,000.
The amount of tax due shall be computed based on
the schedular tax rates of the individual taxpayer.

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ILLUSTRATION 5
The following data are related to the estate of Mr. D and was survived by his spouse and
three qualified dependent children:

Gross income of the estate for the year 6,800,000

Interest income on bank deposits net of 20% final tax 72,000
Dividend income from Domestic Corporation net of final tax 135,000
Itemized deductions of the estate 5,100,000
Amount credited by the administrator to Mrs. D net of 15% withholding tax 552,500
Portion of the estate transferred to Mrs. D on Dec. 31, 2014 1,500,000

ESTATE MR. D
Gross Income 6,800,000 Gross Income 650,000
Itemized Deduction 5,100,000 Personal Exemption (
Net Taxable Income 1,700,000 125,000)
Less: Income distributed (650,000) NET TAXABLE INCOME 525,000
Personal Exemption ( 20,000)
NET TAXABLE INCOME 1,030,000 TAX DUE 133,000
TAX CREDIT ( 97,500)
TAX DUE 294,600 TAX PAYABLE 35,500

TRUST
Agreement created by will or otherwise where the property
of a grantor is being transferred to the trustee or
administrator for purposes of management or conservation of
the property.
TRUSTEE refers to the person who manages and preserves the
property in trust. The trustee is also known as the fiduciary,
administrator or executor.
GRANTOR refers to the owner of the property who
established the trust.
BENEFICIARY refers to the person who will succeed to or
receive the property in trust

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TRUSTS TAX GUIDELINES

The taxable trust is treated like a person whose gross income
shall include all items composing the gross income of an
individual taxpayer.
The deductible items from the income of the trust shall be
computed in the same manner as in the case of an individual
taxpayer. The trust may adopt the OSD or the itemized
deductions.
The following special items shall be deducted:
Income from the trust which was credited to the grantor.
Income from the trust which was credited or distributed to the
beneficiary
Income from the trust which was credited to the guardian of an
infant

TRUSTS TAX GUIDELINES

The trust shall be allowed to deduct the personal exemption
of P20,000.
The income tax shall be computed using the schedular tax
return used by the individual taxpayer.

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ILLUSTRATION 6
Ms. R created an irrevocable trust designating Mr. J as the trustee and his only 3-year-old
boy as the beneficiary. The property in trust is a 10-hectare fishpond with the following
income, expenses, and other related data during the current taxable year:
Gross income from property in trust P 6,200,000
Total itemized deductions 3,500,000
Interest income on bank deposits 150,000
Income distributed to the account of
the beneficiary 500,000
Income credited to the grantor 300,000

REQUIRED: Determine theESTATE

taxable net income of the trust and amount of income tax due.
Gross Income 6,200,000
Itemized Deduction 3,500,000
Net Taxable Income 2,700,000
Less: Income distributed (500,000)
Personal Exemption ( 20,000)
NET TAXABLE INCOME 2,180,000

TAX DUE 662,600

CONSOLIDATION OF INCOME OF TWO

OR MORE TRUSTS
The grantor created several trusts involving separate
properties
Each property in trust is managed by several trustees
The income or the principal of several trusts is for the benefit
of the same beneficiaries.

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CONSOLIDATION OF INCOME OF TWO

OR MORE TRUSTS -GUIDELINES

Each trust is considered a separate legal entity.

Each trustee shall file a separate trust income tax return and
pay the corresponding income tax.
Each trust, upon filing its separate returns, shall be allowed a
personal exemption of P20,000.
A consolidated return shall be prepared for all the trusts and
be allowed P20,000 personal exemption.

CONSOLIDATION OF INCOME OF TWO

OR MORE TRUSTS -GUIDELINES

Each trust shall share on the total income tax due computed
based on the consolidated income using the following
formula:

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ILLUSTRATION 7
Mr. Diaz created two irrevocable trusts designating his two
daughters as the beneficiaries. The following data are related to
the trusts:
Trust 1 Trust 2

Gross Income 600,000 900,000

Itemized deductions 450,000 720,000

Income credited to beneficiary

50,000 75,000

Each trustee filed the tax returns and paid the income tax due.
REQUIRED: Compute the following:
1. The income tax still due on the consolidated trust tax
return.
2. The share of each trust on the income tax still due

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