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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

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117

Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

CHAPTER 13

INCOME TAXES OF PARTNERSHIPS, CO-OWNERSHIP &


JOINT VENTURES
Problem 13 1 TRUE OR FALSE
1. True
2. True because it is withheld with final tax.
3. True
4. False trading business income will make the partnership a commercial partnership.
5. False still subject to final tax of 10%.
6. False not all partnership, only commercial partnership.
7. False tax exempt, but required to file.
8. False the tax withheld is not a final tax but a creditable tax.
9. True starting on the 4th year of operation.
10. True
Problem 13 2 TRUE OR FALSE
1.
2.
3.

False Partners contributions to a partnership are not subject to tax.


False subject to normal tax of individuals
True if created through gratuitous transfer, not more than 10 years and no
contribution is made by the co-owners.
4. False The income should be sourced from a general professional partnership.
5. True
6. True
7. True
8. True
9. True
10. False co-venturers are taxable.
11. True
12. False tax-exempt
Problem 13 3
1. C
2. A
3. B
4. A
5. B
6. C
7. A
8. B
9. B
10. A

Problem 13 4
1. B or C
2. C
3. B
4. B
5. C
6. A
7. A
8. B
9. A
10. A

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)


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118

Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Problem 13 5
D
Net income from trading business as sole proprietor
Less: Share from net loss of the partnership
Net income before personal exemption
Less: Basic personal exemption
Net taxable income

P500,000
200,000
P300,000
50,000
P250,000

The general professional partnership is not a taxable entity for income tax purposes since it is
only acting as a pass-through entity where its income is ultimately taxed to the partners
comprising it. (Sec. 2, Rev. Regs. No. 2-2010)
Accordingly, the partners share from net loss of general professional partnership is allowed to be
deducted from his net income deriving from other business because the GPP is only a passthrough entity.
The partners share in the net loss of the general professional partnership operation is
deductible from the gross income of the individual partner. A general professional partnership is
not in itself an income taxpayer. (Tax vs. Del Rosario, Jr. 55 SCAD, 237 SCRA 324 [1994])
Problem 13 6
B
Net income from trading business as sole proprietor
Less: Basic personal exemption
Net taxable income

P500,000
50,000
P450,000

A commercial partnership is taxable as a corporation, [Sec. 22 (B), NIRC].


Accordingly, the partners share from net income or loss of a commercial partnership shall not be
considered as addition or deduction (as the case may be) from his net income.
Problem 13 7
A
Net profit from trading business of the partnership
Less: Income tax (P400,000 x 30%)
Income after tax
Interest income, net of final withholding tax
Dividend income
Total income for distribution to partners
Divide by profit and loss ratio
Share of each partner
Multiply by dividend tax rate
Income tax on the distributive share of Mitzi Baguingan

P400,000
120,000
P280,000
4,000
10,000
P294,000
2
P147,000
10%
P 14,700

119

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)


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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Problem 13 8
1.
Letter C
Net income (P400,000 P160,000)
Multiplied by applicable income tax rate
Income tax of the partnership
2.

P240,000
30%
P 72,000

Letter D
Partnerships income after tax (P240,000 P72,000)
Divided by profit and loss ratio
Share of A
Less: Final tax (P84,000) x 10%
As share, net of final tax

P168,000
1/2
P 84,000
8,400
P 75,600

Problem 13 9
Computation of partnerships net income:
1.

Not in the choices = P71,250


J, Opting itemized deduction:
Gross income
Less: Allowable deductions
Charitable contributions, actual P15,000
Limit, lower (P325,000 P175,000) x 5%
Net income of the partnership
Js own business
Gross income
Less: Allowable deductions
Charitable contributions, actual P1,750, lower
Limit, (P85,000 P35,000) x 10% = P5,000
Net income own business
Add: Share of J in the partnerships net income (P140,000 x 70%)
Total net income
Less: Personal exemptions (P50,000 + P25,000)
Net taxable income of J

2.

P325,000
P175,000
10,000

185,000
P140,000

P85,000
P35,000
1,750

36,750
P 48,250
98,000
P146,250
75,000
P 71,250

Letter D
R, Opting OSD. Note that in this option, it is assumed that the professional partnership also
used OSD because R.R. No. 2-2010 provides that partner should follow the deduction used
by the GPP. If the GPP used itemized, the partner should also used itemized in determining
his other income from trade or profession; if the partnership used OSD, the partner should
also use the same method of deduction.
Gross income
Less: OSD (P325,000 x 40%)
Net income of the partnership
Rs own business

P325,000
130,000
P195,000
P65,000

120

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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Less: OSD (P65,000 x 40%)


Net income own business
Add: Share of R in the partnerships net income (P195,000 x 30%)
Total net income
Less: Personal exemption
Net taxable income of R

26,000
P39,000
58,500
P97,500
50,000
P47,500

Problem 13 10
C
Net income from trading business of the partnership
Divided by profit and loss ratio
Share of each partner
Add: Compensation income
Total income before personal exemption
Less: Personal exemption
Net taxable income

P400,000
2
P200,000
240,000
P440,000
50,000
P390,000

Note: Interest income and dividend income have been subjected to final tax, hence, not to be
included anymore in an annual taxable income.
Problem 13 11
1.
Letter A
The general professional partnership is exempt from income tax. Persons
engaging in business as partners in a general professional partnership shall
be liable for income tax only in their separate and individual capacities. Each
partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership. (Sec. 26, NIRC)
2.

Letter C
Total partnerships net income not subjected
to final taxes (P1,400,000 + P200,000)

Partner X (P1,600,000 x 60%)


Partner Y (P1,600,000 x 40%)
Less: Personal exemptions
Net taxable income
Tax on P500,000
Add: Tax on excess:
Partner X (P410,000) x 32%
Partner Y (P90,000) x 32%
Income tax due
Less: Creditable withholding taxes:
Partner X (P960,000 x 15%)
Partner Y (P640,000 x 10%)

P1,600,000
Partner X
P960,000

Partner Y

50,000
P910,000

P640,000
50,000
P590,000

P125,000

P125,000

131,200
.
P256,200

28,800
P153,800

144,000
.

64,000

121

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)


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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Income tax still due and payable

P112,200

P 89,800

Inasmuch as the general professional partnership is only a pass-through


entity, the passive income that has been subjected to final taxes shall not
anymore be included in the taxable distributive share of each of the
partners. (Rev. Regs. No. 2-2010, February 18, 2010)
3.

4.

Letter B
Total partnership net income not subjected
to final taxes
Multiplied by corporate normal tax rate
Income tax due

P1,600,000
30%
P 480,000

Letter D
Total partnership net income after tax
(P1,600,000 P480,000)
Add: Interest income, net of 20% final tax
Net income for distribution

P1,120,000
80,000
P1,200,000

Partner X (P1,200,000 x 60%)


Partner Y (P1,200,000 x 40%)
Multiplied by final tax on dividend
Final taxes on share of each partner

Partner X
P720,000
10%
P 72,000

Partner Y
P480,000
10%
P 48,000

The net income for distribution that will be subject to final tax should
include all income subjected to final taxes inasmuch as the commercial
partnership is not a pass-through entity. The dividend income received by
a partnership is exempt from income tax.
Problem 13 12
1. Letter D
None. The objective of co-ownership is to preserve the co-ownership property, therefore, not
subject to tax.

2.

Letter B
The co-owners in an exempt co-ownership are liable for the tax in the income they received
from the co-ownership. They should file the return and pay the corresponding tax based on
their separate and individual capacity.
The net taxable income of Robert is computed as follows:
Share from the income of co-ownership
Less: Personal exemption single
Net taxable income

P1,000,000
50,000
P 950,000

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122

Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Income received by the co-owners is already net of itemized deductions of the co-ownership,
therefore, the co-owners in their individual capacity is not anymore entitled to optional standard
deduction. Inasmuch as the related expenses have been deducted before the distribution of
income to the co-owners, [Sec. 34 (L), NIRC].
Supreme Court Ruling - Deductions and exemptions are highly disfavored in law. They must be
construed strictly against the taxpayer, (Commissioner of Internal Revenue vs. P. J. Kiener
Company, LTD., 65 SCRA 143).
Problem 13 13
1. Letter B
BIR Ruling (August 18, 1959) provides that the co-ownership shall be taxed as a corporation
if the property was not divided for more than ten (10) years. Therefore, the tax on the income
of the co-ownership would be:
Income of co-ownership
Multiply by corporate normal tax rate
Income tax as corporation

2.

Letter C
Final tax on dividend of Marjorie Sison:
Amount received from co-ownership
Multiply by final tax rate on dividend
Final withholding tax on dividend income

3.

P5,000,000
30%
P1,500,000

P1,000,000
10%
P 100,000

Letter D
The amount received by Grace Ann Subala shall no longer be reported in the ITR since it has
been subjected to final tax on dividend.

Problem 13 14
D
A joint venture for a construction project of the Government is not subject to income tax.
Consequently, gross payments to said joint venture are not subject to withholding tax. The joint
venture, being exempt from corporate income tax, is not required to file quarterly and final or
adjusted income tax returns. (BIR Ruling No. DA-415-2005 dated October 4, 2005)
Problem 13 15
C
Sales, net of VAT (P67,200,000/1.12)
Less: Costs, net of VAT (P44,800,000/1.12)
Gross income
Less: OSD (P20,000,000 x 40%)
Net taxable income
Multiplied by corporate income tax
Income tax due

P60,000,000
40,000,000
P20,000,000
8,000,000
P12,000,000
30%
P 3,600,000

123

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)


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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

As a general rule, all partnerships, associations or joint ventures are to be taxed as a


corporation, except general professional partnerships and joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under a service
contract with the government. [Sec. 22 (B), NIRC]

Problem 13 16
1. The partnership is a general professional partnership, therefore, tax exempt.
2. and 3. Computation of tax liabilities of partners A and B.
Net income of the partnership (P1,200,000 P700,0000)

Partners salary
Add: Distribution of partnerships income
Total
Less Personal exemption
Net taxable income
Tax on P250,000
Tax on excess (P240,000 x 30%)
Tax on excess (P210,000 x 30%)
Income tax due and payable

P500,000

Partner A = 60%
P240,000
300,000
P540,000
50,000
P490,000

Partner B = 40%
P360,000
200,000
P560,000
100,000
P460,000

P 50,000
72,000
.
P122,000

P 50,000

Total
P 600,000
500,000
P1,100,000

63,000
P113,000

Problem 13 17
Gross income
Less: Business expenses
Net income before other income
Add: Taxable dividend dividend received from a nonresident foreign corporation
Total net taxable income
Less: Income tax due (P380,000 x 30%)
Net income after tax

P575,000
255,000
P320,000
60,000
P380,000
114,000
P266,000

Note: Dividends received from domestic corporation by a general co-partnership is tax exempt.

124

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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Computation of partnership share considered as dividends:


Net income (P266,000)
Dividends from domestic corporation (P40,000)
Interest income, net of final tax of 20%, (P8,000)
Distributive partners share on general co-partneship
Multiplied by final tax rate
Final tax on share on partnership income

P
P

M - 40%
106,400
16,000
3,200
125,600
10%
12,560

W 60%
P 159,600
24,000
4,800
P 188,400
10%
P
18,840

Note: In a general co-partnership, the share of individual partner is considered as dividend


income.
Problem 13 18
1
Not a government project
.
a.
Contract price, excluding VAT (P112,000,000/1.12)
Less: Cost of construction, net of VAT (P72,800,000/1.12)
Gross income
Less: Operating expenses
Net income
Multiplied by corporate income tax rate
Income tax due
b.

2
.

P100,000,000
65,000,000
P 35,000,000
15,000,000
P 20,000,000
30%
P 6,000,000

The shares of joint venturers, X Co and Y Co, are not


subject to income tax under inter-corporate dividend rule.

Government project (consortium)


a.

Tax-exempt

b.

Share of co-venturers in the net income (P20M x 50%)


Multiplied by corporate income tax rate
Income tax due

X Co.
P10,000,000
30%
P 3,000,000

Y Co.
P10,000,000
30%
P 3,000,000

Note: OSD is not applicable to co-ventures because their respective shares are already net of
expense.
Problem 13 19
1
Not a government project
.
a.
Contract price, excluding VAT (P89,600,000/1.12)
Less: Cost of construction, net of VAT (P56,000,000/1.12)
Gross income
Less: Operating expenses
Net income
Multiplied by corporate income tax rate

P80,000,000
50,000,000
P30,000,000
10,000,000
P 20,000,000
30%

125

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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

Income tax due


b.

2
.

6,000,000

The share of joint venture partners X Co and Y Co is not


subject to income tax under inter-corporate dividend rule.

Government project (consortium)


a.

Tax-exempt

b.

Share of co-venturers in the net income (P20M x 50%)


Multiplied by corporate income tax rate
Income tax due

X Co.
P10,000,000
30%
P 3,000,000

Y Co.
P10,000,000
30%
P 3,000,000

Alternative solution using OSD:


Note: If the joint venture opted to use OSD, it will have a lower income tax obligation, computed
as follows:
1.

Not a government project


a. Contract price, excluding VAT (P89,600,000/1.12)
Less: Cost of construction, net of VAT (P56,000,000/1.12)
Gross income
Less: OSD (P30,000,000 x 40%)
Net income
Multiplied by corporate income tax rate
Income tax due
b
.

P80,000,000
50,000,000
P30,000,000
12,000,000
P18,000,000
30%
P 5,400,000

The share of joint venture partners X Co and Y Co is not


subject to income tax under inter-corporate dividend rule.

2.

Government project (consortium)


a. Tax-exempt
b
.

Share of co-venturers in the net income (P20M x 50%)


Multiplied by corporate income tax rate
Income tax due

X Co.
P9,000,000

Y Co.
P9,000,000

30%
P 2,700,000

30%
P 2,700,000

Problem 13 20
1. As a general co-partnership, the income tax of ATIN Partnership is computed as follows:
(a)
Gross income
Less: allowable deductions
Net taxable income
Multiplied by applicable tax rate
Income tax of the partnership

P500,000
100,000
P400,000
30%
P120,000

126

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Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

(b) Income tax liabilities of the partners:


Distributive shares of the partners
(P400,000-P120,000) /2
Multiplied by applicable tax rate
Final tax on distributive share of partners

E.

A. Co.

P 140,000
10%
P 14,000

P 140,000
10%
P 14,000

2.
(a) As a general professional partnership, ATIN Partnership is exempted from income tax.
(b)
Distributive shares of E. Cao and A. Co
(P500,000-P100,000)/2
Less: Personal exemption
Net taxable income
Tax on P140,000
Excess P10,000 x 25%
Income tax
Less: Creditable withholding tax
(P200,000 x 10%)
Income tax still due and payable
Problem 13 21
1.
Letter D
200A Net loss per GAAP
Add (Deduct) Adjustments:
Nondeductible representation
expense [P300,000 - (P3M/60%) x 0.005]
Tax differential [(P40,000/80%) x 33%]
Nondeductible bad debts expense (P50,000 x 60%)
Contribution expense
Nondeductible income tax paid
Interest income subjected to final tax
Net taxable income before contribution expense
Less: Deductible contribution expense (P471,500 x 5%)
Net taxable income 200A

E. Cao

A. Co.

P200,000
50,000
P150,000

P200,000
50,000
P150,000

P 22,500
2,500
P 25,000

P 22,500
2,500
P 25,000

20,000
5,000

20,000
5,000

(P385,000)

275,000
16,500
30,000
200,000
375,000
( 40,000)
P471,500
23,575
P447,925

Since the fire loss and fire loss insurance recovery were both reported as expense and
income, there is no need for their adjustments.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)


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127

Chapter 13: Income Taxes of Partnerships, Co-ownership & Joint Ventures

2.

3.

Letter C
200B Net income per GAAP
Add (Deduct) Adjustments:
Nondeductible representation
expense [P400,000 - (P6M/60%) x 0.005]
Tax differential [(P48,000/80%) x 33%]
Nondeductible bad debts expense (P150,000 x 60%)
Contribution expense
Nondeductible income tax
Bad debts recovered without tax benefit
[P30,000 (P50,000 x 40%)]
Interest income subjected to final tax
Net taxable income before contribution expense
Less: Deductible contribution expense (P2,779,800 x 5%)
Net taxable income 200B
Letter C
Net taxable income 200B
Multiplied by corporate normal tax rate
Income tax due
Less: Quarterly income tax paid 200B
Income tax still due and payable

P1,478,000

350,000
19,800
90,000
400,000
500,000
(
10,000)
(
48,000)
P2,779,800
138,990
P2,640,810

P2,640,810
30%
P 792,243
500,000
P 292,243