Legal basis and linked tax rules
- Section 1 ties the Regulations to the authority under Sec. 244 and to Republic Act No. 9504 (amending Sec. 34(L) of the Tax Code of 1997, as amended).
- Section 2 anchors the GPP treatment in Sec. 26 of the Tax Code, and states that a GPP is not subject to income tax under Title II, while partners are taxed on their separate and individual capacities for their distributive share.
- Section 2 also uses Sec. 34(A) to (J) and Sec. 34(L) concepts to explain that a GPP may claim itemized deductions or OSD.
- Section 2 further invokes Sec. 31 for the concept that taxable income computation includes ordinary and necessary expenses incurred for the practice of profession.
- Section 3 anchors election rules by referencing the OSD cap for:
- individuals under Secs. 24(A) and 25(A)(1), and
- corporations under Secs. 27(A) and 28(A)(1).
Policy and purpose of OSD election
- Section 1 provides that the Regulations clarify the manner of claiming OSD by General Professional Partnerships and their partners.
- Section 1 also clarifies the manner of manifesting the election to use OSD for the taxable year concerned by all taxpayers entitled to it.
- The Regulations establish that the election between OSD and itemized deductions follows prescribed rules and becomes irrevocable for the taxable year once signified in the return (Section 3).
- The Regulations ensure a consistent deduction type between the level of the GPP and the partners when computing the partners’ taxable income (Section 2).
Scope: entities covered and tax treatment
- Section 2 applies to General Professional Partnerships (GPPs) and the partners comprising them.
- Section 2 provides that a GPP is not a taxable entity for income tax purposes because it acts as a “pass-through” entity where income is ultimately taxed to the partners.
- Section 2 provides that partners are liable to pay income tax in their separate and individual capacities for their respective distributive share in the GPP’s net income.
- Section 2 provides that, for computing taxable income, the net income of the GPP is computed in the same manner as a corporation for purposes of determining partners’ distributive shares (Sec. 26 of the Tax Code as invoked in Section 2).
- Section 3 applies to taxpayers entitled to OSD, and governs how they signify election in the income tax return (including individual and corporate taxpayers).
OSD for GPPs and partners (Section 6 amendment)
- Section 2 amends Section 6 of Revenue Regulations No. 16-2008 to set the framework for determining OSD for General Professional Partnerships and their partners.
- A GPP may claim either:
- the itemized deductions allowed under Section 34(A) to (J) of the Tax Code, or
- OSD allowed to corporations, in an amount not exceeding forty percent (40%) of its gross income.
- Section 2 provides that the net income determined by either claiming itemized deductions or OSD from the GPP’s gross income becomes the distributable net income, from which each partner’s share is determined.
- Partners must report as gross income their distributive share, actually or constructively received, in the net income of the partnership (Section 2).
Partner deduction consequences depending on GPP’s choice
Rule (1) — If the GPP availed itemized deductions: partners may still claim itemized deductions from their share, but partners are precluded from claiming the same expenses already claimed by the GPP.
Section 2 gives examples of partner-level itemized deductions when the GPP used itemized deductions, including:
- representation expenses where the covering invoice or receipt is issued in the partner’s name,
- traveling expenses while away from home that were not liquidated by the partnership,
- depreciation of a car used in the practice of profession where the car is registered in the partner’s name, and
- similar expenses.
Section 2 provides that if the GPP claimed itemized deductions, partners are not allowed to claim OSD from their share in the net income because OSD is a proxy for all items of deductions used in arriving at taxable income.
Rule (2) — If the GPP availed OSD: partners can no longer claim further deduction from their share in the net income.
Section 2 states the reasons partners cannot claim further deductions when the GPP chose OSD:
- the partner’s distributive share is treated as gross income, and the 40% OSD for individuals is mandated to be deducted from gross sales/receipts (not from gross income), and
- the OSD is in lieu of the itemized deductions used to compute taxable income and therefore answers for both the GPP and its partners’ deduction items.
Rule (3) — One type at both levels: the deduction type chosen by the GPP must match what partners can avail in computing taxable income.
Section 2 provides that:
- if the GPP claims itemized deductions, all items of deduction allowed under Section 34 can be claimed both at the level of the GPP and at the level of the partner to determine taxable income; and
- if the GPP opts to claim OSD, partners are deemed to have availed of the OSD because OSD is in lieu of the itemized deductions that can be claimed.
Rule (4) — Other gross income of the partner: if a partner derives other gross income from trade, business, or practice of profession distinct from the partnership share, the deductions from that other gross income follow the same deduction treatment explained above.
Section 2 provides the exception for partners when the GPP opted for OSD: the individual partner may still claim 40% of gross income from trade, business, or practice of profession, but not to include the partner’s share from the net income of the GPP.
OSD election rules and consequences (Section 7 amendment)
- Section 3 amends Section 7 of Revenue Regulations No. 16-2008 to govern the other implications of the OSD election.
- A taxpayer who elected to avail of OSD must cap the deduction as follows:
- not exceeding forty percent (40%) of gross sales or gross receipts for individuals under Secs. 24(A) and 25(A)(1), or
- forty percent (40%) of gross income for corporations under Sec. 27(A) or 28(A)(1).
- Section 3 requires that the taxpayer signify the election in the income tax return; otherwise, the taxpayer is considered to have availed of the itemized deductions allowed under Sec. 34.
Irrevocability and quarterly consistency
- Once the election to avail of OSD or itemized deductions is signified in the return, it is irrevocable for the taxable year for which the return is made (Section 3).
- The election must be made by checking the appropriate box in the income tax return filed for the first quarter of the taxable year.
- After the election is made, the same deduction type must be applied consistently for all succeeding quarterly returns and in the final income tax return for the taxable year (Section 3).
- Section 3 provides that a taxpayer required but failing to file the quarterly income tax return for the first quarter is considered to have availed of the itemized deductions option for the taxable year.
Impact on final return
- Section 3 provides that if OSD is availed in the first quarter, the same OSD must be applied for the rest of the year, including the final income tax return due on or before the 15th day of the fourth month following the close of the taxable year.
- Section 3 provides that if itemized deductions are availed in the first quarter, or if the taxpayer fails to file the income tax return for the first quarter, the taxpayer must use itemized deductions for the rest of the year, including the final income tax return due on or before the 15th day of the fourth month following the close of the taxable year.
Financial statements and recordkeeping
- Section 3 provides that an individual taxpayer entitled to and who claimed the OSD shall not be required to submit with the tax return the financial statements otherwise required under the Code, except when the Commissioner otherwise permits.
- Section 3 requires that the individual must keep records pertaining to gross sales or gross receipts (subject to the stated Commissioner permission framework).
- Section 3 provides that a corporation is still required to submit financial statements when it files its annual income tax return and to keep records pertaining to its gross income as defined in the provision.
Repeals and effect on inconsistent rules
- Section 4 provides that all revenue issuances or portions thereof inconsistent with these Regulations are amended, modified, or repealed accordingly.
- The Regulations expressly operate by amending Sections 6 and 7 of Revenue Regulations No. 16-2008.