93-04 - Partnership Tax

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CPA REVIEW SCHOOL OF THE PHILIPPINES


Manila

PARTNERSHIPS, JOINT VENTURE


AND CO-OWNERSHIP Dela Cruz / De Vera / Llamado

1. As regards a business partnership, which of the following is not correct?


a. The partnership must file quarterly and year end income tax returns.
b. The distributable income available to the partners is the taxable income in its ITR less the income
tax thereon.
c. The share of a partner in the distributable net income, even if not actually received is considered
constructively received by the partner.
d. The share of a partner in the distributive net income whether actually received or not is subject to a
final withholding tax on dividends.

2. The following statements regarding taxable partnerships are correct, except


a. They file quarterly and year-end income tax returns.
b. They are subject to the rules on corporation for capital gains tax, final tax on passive income, regular
corporate income tax, and MCIT.
c. The partners’ share in the distributable net income is subject to final tax.
d. They were subject to the IAET before the same was repealed.

3. Regarding a general professional partnership, which of the following is not correct?


a. It shall not be subject to income tax.
b. The partners shall be liable for income tax on their respective distributive shares.
c. Each partner shall report in his ITR his distributive share in the partnership net income.
d. The share of a partner shall be subject to a creditable withholding tax of 10% if his distributive
share does not exceed P3.0 Million and 15% if it exceeds P3.0 Million

Reason: The share of a partner shall be subject to a creditable


withholding tax of 10% if the current year’s income payments
to the partner total ₱720,000 or below, or 15% if the same
exceeds ₱720,000.

4. A partner, on his own transactions, is on the cash method of accounting while the general professional
partnership is on the accrual method of accounting. In the partner’s determination of his taxable income
for the year, he
a. Must convert his income from the partnership into cash method.
b. Must convert his own income into accrual method.
c. Does not report his income from the partnership because the partnership is exempt from income tax.
d. Can consolidate his share in the net income of the partnership under accrual method with his own
income under the cash method.

5. Which of the following statements is not correct?


a. When the co-owners invest the income of the property co-owned in a business or in any income
producing properties or activities constituting themselves into a business partnership, such
partnership is consequently subject to tax as a corporation.
b. As a rule, a co-ownership is not subject to income tax because the activities of the co-owners are
limited to the preservation and enjoyment of the property and the collection of the income therefrom.

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c. A co-owner is subject to income tax on his share in the net income of the co-ownership actually or
constructively received.
d. All partnerships, no matter how created or organized, are considered corporations subject to
corporate income tax.

6. As regards an ordinary partnership, which of the following statements is correct?


a. Partners’ shares are subject to final tax, hence the partnership need not file an ITR.
b. Subject to improperly accumulated earnings tax.
c. Treated like corporations, hence partners have limited liability.
d. Partners’ shares, even if distributed, will not be included in their respective ITRs.

7. As regards a general professional partnership, which of the following statements is correct?


a. Treated like a corporation, hence it is subject to the corporate income tax.
b. It is exempt from income tax, hence it need not file an ITR.
c. Partners’ shares are subject to final tax.
d. Partners’ shares will be included in their respective ITRs, whether distributed or not.

8. Statement 1 – A CPA and a Lawyer may form a general co-partnership to sell law and accounting
books.
Statement 2 – Partnerships and Corporations have separate juridical personalities distinct from the
owners. Therefore, partners and stockholders are not liable to creditors of the business.
a. True; true
b. False; false
c. False; true
d. True; false

9. Statement 1 – The general professional partnership may claim itemized deductions in computing its
net income and a partner may also claim itemized deductions in computing his net taxable income.
Statement 2 – The general professional partnership may claim the optional standard deduction in
computing its net income while a partner may claim itemized deductions in computing his net taxable
income.
a. True; true
b. True; false
c. False; true
d. False; false

10. Statement 1 – The general professional partnership may claim itemized deductions in computing its
net income while a partner may claim the optional standard deduction in computing his net taxable
income.
Statement 2 - The general professional partnership may claim the optional standard deduction in
computing its net income and a partner may also claim the optional standard deduction in computing
his net taxable income.
a. True; true
b. True; false
c. False; true
d. False; false

11. The net share received by a partner in a general professional partnership is


a. Part of his taxable income in his/her ITR.
b. Exempt from income tax
c. Subject to 10% creditable withholding tax
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d. Subject to final tax

12. The net share received by a partner in a general co-partnership is


a. Part of his taxable income in his/her ITR.
b. Exempt from income tax
c. Subject to 10% creditable withholding tax
d. Subject to final tax

13-15) A and B are partners in a Partnership which realized a gross income of ₱800,000 with a
corresponding ₱350,000 in expenses in the year 2021. A is married with 2 qualified dependent
children, with his own business generating net sales of P400,000, and incurring cost of sales and
deductible expenses of ₱30,000 and P230,000, respectively. B, single, also has his own business
generating ₱450,000 in net sales, and incurring cost of sales and deductible expenses of ₱200,000
and ₱50,000, respectively. They share profits and losses of their partnership at 4:6.

If the partnership is a GPP, the taxable income of A who avails of the OSD is:
a. P 420,000
b. P 70,000
c. P 302,000
d. None of the above

Solution below:

13) Partner A

Sales/Revenues/Receipts/Fees 400,000
Less: Cost of Services (0 is OSD) -
Gross Income from Operation 400,000
Less: OSD (40%) (160,000)
Net income from Operations 240,000
Add: Non-operating income -
Share in the GPP Net income, gross 180,000 180,000
Total taxable income 420,000

14) And the taxable income of B who itemizes deductions is:


a. P 150,000
b. P 470,000 14) Partner B
c. P 450,000
Sales/Revenues/Receipts/Fees 450,000
d. None of the above.
Less: Cost of Services (200,000)
Gross Income from Operation 250,000
Less: Itemized Deductions (50,000)
Net income from Operations 200,000
Add: Non-operating income -
Share in the GPP Net income, gross 270,000 270,000
Total taxable income 470,000

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15) If the partnership is an OP, its tax due is


a. P 144,000
b. P 148,500
c. P 112,500 15)
d. P 157,500
Partnership's net taxable income 450,000
Tax rate 25%
Tax due 112,500

Note: If the question is silent, the corporate tax rate is presumed to be


25%

16– 19) AB partnership with A and B as partners (both resident citizens) had a net professional income
amounting to P500,000 for 2021. Its other income included bank interest income of P8,000, net of final
withholding tax and royalty income of P10,000, net of the final withholding tax. Total assets of the
partnership amount to ₱50.0 Million.

A is single and has his own separate eatery business. In 2021, his business had net sales of ₱1,000,000,
cost of sales of ₱600,000, and operating expenses of ₱200,000.

16) The share of A in the income of the GPP, net of the 15% CWT, is
a. Php250,000 c. Php225,000
b. Php259,000 d. Php220,150

17) The net taxable income and income tax payable of A who shares profit and loss equally with B in
their GPP is:
a. P450,000; P3,650
b. P400,000; P10,450 17) Graduated Rates
c. P439,000; P9,670
Sales/Revenues/Receipts/Fees
d. None of the above.
Less: Cost of Services
Gross Income from Operations
Less: Itemized Deductions
Net income from Operations
Add: Non-operating income
Share in the GPP Net income
Total taxable income
Tax due (table)
Less: CWT
Tax Payable

18) Using the preceding number, but it is a business partnership, the taxable income of the partnership is
a. P518,000
b. P500,000
c. P510,000
d. P508,000

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19) Using the preceding number, the net distributable share of B (resident citizen) is
a. P162,500
b. P157,500
c. P188,100
d. P154,350
Net taxable income of AB
Tax rate
Tax due

After-tax net income


Add: Int. income
Royalty income
Total income after tax

B's 50% share


Less: 10% FT
B's distributable share, net of FT

20) A lawyer was rejected by his extremely sexy and gorgeous secretary. He became so enraged that he
raped her 10 times within 15 minutes. Since then, he became known in the media as the “Machine Gun
Rapist.” For his defense, he obtained the services of ACCRA, the biggest law partnership in the
Philippines. ACCRA asked for a fee of ₱10,000,000 for its legal services in defending him. How much
should the lawyer withhold as CWT from ACCRA’s fee?
a) 10% b) 15% c) 5% d) None.

21) A and B are co-owners by virtue of a property given to them by their father. The co –ownership had a
gross rental income of P500,000 and expenses related to rental activity of P300,000 but 10% is not
deductible for the year 2021. A and B share in the profits at 75% and 25%, respectively. A withdrew
P50,000 from the co-ownership net income for the year; B did not withdraw any amount. A and B are
both single. The income tax liability of the co-ownership is
a. ₱ 102,400 c. ₱ 80,000
b. ₱ 76,800 d. ₱ -0-

22) A’s share in the net income of the co-ownership is:


a. P 172,500
b. P 150,000
c. P 122,500
d. P – 0 –

23) Suppose in the next year, the co-owned property has the same gross rental income of ₱500,000 and
expenses related to rental activity of ₱300,000 but 10% thereof is not deductible.

In that same year, A and B did not divide but instead invested the entire profits from the co-owned
property in a business venture offering property management services. In the same year, this business
had revenues of ₱750,000, cost of revenues of ₱300,000, operating expenses of ₱135,000, and non-
operating income of ₱55,000.

The tax due of the “co-ownership” is


a. P 150,000
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b. P 232,500
c. P 0
d. None of the above.

24) X and Y (both resident citizens) are partners in the following partnerships:

Ordinary Partnership General Professional Partnership


Gross Income P 500,000 P 400,000
Deductible expenses 300,000 180,000

They have the following personal income and expenses:

X Y
Gross Income P 400,000 P 280,000
Deductible expenses 250,000 120,000
Dividend from domestic corporation 20,000 30,000
Dividend from foreign corporation 10,000 8,000
Prize, supermarket raffle 15,000 8,000
Royalty, books 10,000 12,000

Partners agreed to share partnership income and losses as follows:


X = 40% (Partner X is married with 2 qualified dependent children)
Y = 60% (Partner Y is single but supporting her 18 year-old boyfriend living with and dependent
upon her for his chief support)
Determine the respective net taxable incomes of partners X and Y in their ITRs for 2021:

a. P148,000, P258,000
b. P88,000, P132,000
c. P248,000, P308,000
d. None of the above.

GPP
Gross Income
Expenses
Net income

X – 40% Partner

Gross Income
Less: Itemized Deductions
Net income from Operations
Add: Non-operating income (Div. from FC)
Share in the GPP Net income (40%)
Total taxable income

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Y – 60% Partner

Gross Income
Less: Itemized Deductions
Net income from Operations
Add: Non-operating income:
Div. from FC
Prize - Supermarket
Share in the GPP Net income (60%)
Total taxable income

25) A Co. and B Co., domestic corporations, both in the construction business, formed a joint venture to
build houses for the poor, a government project, with an agreed equal sharing in net income. The joint
venture, A Co., and B Co. are all licensed by the PCAB. Data on income and expenses for the calendar
year 2021 show:
Joint Venture A Co. B Co.
Gross Income P 80,000,000 P 2,000,000 P 3,000,000
Expenses 60,000,000 1,200,000 2,000,000

Determine:

i) The income tax liability of the joint venture.


a. P 6,000,000 c. P1,800,000
b. P 20,000,000 d. P 0

ii) The income tax liability before tax credits of A Co:


a. P 2,700,000 c. P 7,560,000
b. P 10,800,000 d. P 6,000,000

JV
Gross Income
Expenses
Net income

A Co.
Gross Income from Operations
Add: Other taxable income not subject to FT:
50% Share in NI of JV
2,000,000
Total Gross Income
Less: Itemized Deductions
10,000,000
Net taxable income
12,000,000
Tax rate
(1,200,000)
Income tax due
10,800,000
30%
3,240,000

26) A Co. and B Co., domestic corporations, both engaged in the transportation business with operations in
Northern and Central Luzon formed a joint venture agreeing to distribute the net income of the joint
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venture equally. In calendar year 2021, the joint venture had a gross income of P5,000,000 and expenses
of P3,500,000.

Determine:
i) The income tax liability of the joint venture.
a. P 375,000 c. P1,050,000
b. P 5,000,000 d. P 0

ii) The share of A Co. in the distributable net income of the JV:

a. P 562,500 c. P 472,500
b. P 52,500 d. P1,050,000

iii) Final tax on the share of A Co. in the distributable net income of the JV:

a. P 562,500 c. P78,750
b. P105,000 d. 0

The End!!

Tax 93-04

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