95 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts CHAPTER 13 INCOME TAXES OF PARTNERSHIPS, ESTATES & TRUSTS Problem 13 – TRUE OR FALSE False – not all partnership, only commercial partnership False – tax exempt, but required to file False – the tax withheld in creditable True – starting on the 4th year of operation True True True – because it is withheld with final tax True False – trading business income will make the partnership a commercial partnership 10 False – still subject to final tax of 10% 11 True – if created through gratuitous transfer, not more than 10 years and no contribution is made by the co-owners 12 True 13 True Problem 13 True False False True True True True False True 10 True 11 False 12 True – TRUE OR FALSE – It shall be in writing either as trust inter-vivos or through a will – A trustor is the person who establishes the trust, not the trustee – P50,000 – the personal exemption is P50,000 Problem 13 – A B C C B C B B B 10 A Problem 13 – A A B A C A B D B 10 A 11 C Problem 13 – A Net profit from trading business of the partnership Less: Income tax (P400,000 x 30%) Income after tax P400,000 120,000 P280,000 96 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts 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 Problem 13 – (1 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 A Partnership’s income after tax (P240,000 – P72,000) Divided by profit and loss ratio Share of A Less: Final tax (P84,000) x 10% A’s share, net of final tax Problem 13 – A J, Opting itemized deduction: Share of J in the Partnership (325,000-175,000) x 70% Other business income Total business income Less: Itemized deductions (excluding contribution) Net income before contribution Less: Contribution Actual, P1,750 + (15,000 x 70%) =P12,250 Limit, P155,000 x 10% or P15,500 Allowed Net taxable before personal exemption Less: Personal exemption (P50,000 + 25,000) Net taxable income of J 4,000 10,000 P294,000 P147,000 10% P 14,700 D R, opting for standard optional deduction: Share in the partnership, gross (P325,000 x 30%) Other business income Total business income Less: Optional standard deduction (P162,500 x 40%) Net income before personal exemption Less: Personal exemption - single Net taxable income Problem 13 – Net income from trading business of the partnership Divided by profit and loss ratio Share of each partner P168,000 1/2 P 84,000 8,400 P 75,600 P105,000 85,000 P190,000 35,000 P155,000 12,250 P142,750 75,000 P 67,750 P 97,500 65,000 P162,500 65,000 P 97,500 50,000 P 47,500 P400,000 P200,000 97 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Add: Compensation income Total income before personal exemption Less: Personal exemption Net taxable income 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 – D None The objective of co-ownership is to preserve the co-ownership property, therefore, not subject to tax 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 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) 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 – 10 D Income after expenses but before distribution to heir Less: Gross amount distributed to heir (P85,000/85%) Exemption Net taxable income Problem 13 – 11 B Income of the grantor Income of trust A - revocable Total income of the grantor Less: Total expenses Grantor – business expense Trust A – business expense Grantor’s income before personal exemptions D Income of trust B – irrevocable trust Less: Expenses of irrevocable trust – B Net income before exemption Less: Personal exemption Net taxable income of all the trust P400,000 P100,000 50,000 150,000 P250,000 P1,000,000 500,000 P1,500,000 P400,000 200,000 600,000 P 900,000 P200,000 100,000 P100,000 50,000 P 50,000 98 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Not in the choices Income of beneficiary (P100,000 – P40,000) Add: Share from trust Net taxable income before personal exemption Less: Personal exemption Net income P 60,000 50,000 P110,000 50,000 P 60,000 Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions (Sec 34(L), NIRC) Alternative solution of 3: If beneficiary opted to use OSD Not in the choices Income of beneficiary Add: Share from trust Total gross income Less: OSD (P150,000 x 40%) Net income before personal exemption Less: Personal exemption Net income P100,000 50,000 P150,000 60,000 P 90,000 50,000 P 40,000 Problem 13 – 12 The partnership is a general professional partnership, therefore, tax exempt and Computation of tax liabilities of partners A and B Net income of the partnership (P1,200,000 – P100,0000) Partner’s salary Distribution of balance 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 Partner A = 60% P240,000 300,000 P540,000 50,000 P490,000 P 50,000 72,000 P122,000 P1,100,000 Partner B = 40% P360,000 200,000 P560,000 100,000 P460,000 Total P 600,000 500,000 P1,100,000 P 50,000 63,000 P113,000 Problem 13 – 13 Gross income – merchandising Dividend received from nonresident foreign corporation Ordinary and necessary expenses – merchandising Net income before income tax Less: Provision for income tax (P380,000 x 30%) Net income P575,000 60,000 (255,000) P380,000 114,000 P266,000 Note: Dividends received from domestic corporation by a general co-partnership is tax exempt Computation of partnership share considered as dividends: Net income (P266,000) P M - 40% 106,400 W – 60% P 159,600 99 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Dividends from domestic corporation (P40,000) Interest income, net of final tax of 20%, (P8,000) Distributive partner’s share on general co-partneship Multiply by final tax rate Final tax on share on partnership income P P 16,000 3,200 125,600 10% 12,560 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 – 14 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 P5,000,000 30% P1,500,000 Final tax on dividend of Marjorie Sison: Amount received from co-ownership Multiply by final tax rate on dividend Final tax on dividend – income tax withheld P1,000,000 10% P 100,000 The amount received by Grace Ann Subala shall no longer be subjected to normal tabular tax because it has been subjected to final tax on dividend Problem 13 – 15 Answer Conjugal gross income from estate Less: Business expense (P5,000,000 x 40%) Income distributed to beneficiaries Conjugal net income P5,000,000 P2,000,000 600,000 2,600,000 P2,400,000 200x income tax due from the estate of Mr Baguingan: Share of Mr Baguingan from the net income of the conjugal estate (P2,400,000 x 50%) Less: Personal exemptions (P50,000 + P25,000) Taxable income P1,200,000 75,000 P1,125,000 Tax on P500,000 Tax on excess (P625,000) x 32%) Income tax due P 125,000 200,000 P 325,000 Mr Baguingan’s income from estate shall claim the total amount of P75,000 personal exemptions (RA 9504) because Sec 35C of the NIRC provides that if the taxpayer dies during the taxable year, his estate may claim the corresponding additional exemptions for himself and his dependent(s) as if he died at the close of such year Hence, the applicability of the exemption of the income from estate amounting to P50,000 shall take effect only in the succeeding years after the decedent’s death Answer Compensation income Add: Income received from trust Total income before personal exemption Less: Personal exemptions (P50,000 + P100,000) P250,000 200,000 P450,000 150,000 100 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Net taxable income P300,000 Tax on P250,000 Tax on excess (P50,000 x 30%) Income tax due P50,000 15,000 P65,000 Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions (Sec 34(L), NIRC) Alternative solution: If beneficiary opted to use OSD Compensation income Add: Income received from trust, net of OSD (P200,000 x 60%) Total income before exemption Less: Personal exemptions: Basic Additional (P25,000 x 4) Taxable income of Mrs Diana Nievera P250,000 120,000 P370,000 P 50,000 100,000 150,000 P220,000 Tax on P140,000 Tax on excess (P80,000 x 30%) Income tax due P 22,500 24,000 P 46,500 Answer Total amount received by the children Multiply by withholding tax rate Total withholding taxes P600,000 15% P 90,000 Problem 13 – 16 Correction: Second paragraph should be…”A year following the death of Naty Poc….” Tax savings: Income tax when no income of estate was distributed (Case + Case 3) (P122,000 + P8,500) Less: Income tax when P150,000 of estate’s income was distributed (Case + Case 4) = (P77,000 + P42,500) Tax savings P130,500 119,500 P 11,000 Supporting computations: Gross income Business deductions: Itemized deductions Distributed income of the estate Net income before personal exemption Personal exemption Net taxable income Income tax for first bracket Income tax on excess Case 1: (490,000 – 250,000) x 30% Case 2: (340,000 – 250,000) x 30% Case 4: (220,000 – 140,000) x 25% Total income taxes Case Case Case Case 800,000 800,000 300,000 300,000 (260,000) 540,000 (50,000) 490,000 (260,000) (150,000) 390,000 (50,000) 340,000 (180,000) 120,000 (50,000) 70,000 (180,000) 150,000 270,000 (50,000) 220,000 50,000 50,000 8,500 22,500 27,000 77,000 8,500 20,000 42,500 72,000 122,000 Problem 13 – 17 Income tax payable by the trust in 200x: 101 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Income from house and lot Income from hollow block business (P10,000 x 12) Income from farm Total gross income from trust Less: Related expenses (P250,000 x 30%) Amount distributed to the beneficiary Net income before exemption Less: Exemption Net taxable income P 80,000 120,000 50,000 P 250,000 P 75,000 50,000 Tax on P70,000 Tax on excess (P5,000 x 20%) Total income tax payable 125,000 P 125,000 50,000 P 75,000 P 8,500 1,000 9,500 P Income tax payable from the beneficiary in 200x: Gross income received from income of trust Less: Personal exemption Net taxable income P 50,000 50,000 P Total income tax payable P Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions (Sec 34(L), NIRC) Alternative solution – if Trust and beneficiary opted to use OSD Total gross income – trust Less: OSD (P250,000 x 40%) Amount distributed to the beneficiary Net income before personal exemption Less: Personal exemption Net taxable income P250,000 P100,000 50,000 150,000 P100,000 50,000 P 50,000 Tax on P30,000 Tax on excess (P20,000 x 15%) Total income tax payable P2,500 3,000 P5,500 Gross income received from income of trust Less: Optional standard deduction (P50,000 x 40%) Net income before exemption Less: Personal exemption Net taxable income P50,000 20,000 P30,000 50,000 (P30,000) Total income tax payable P Problem 13 – 18A Correction: The requirement should be stated as: How much is the income tax due and payable of the two trusts? Total income of trusts (P50,000 + P1,000,000) Less: Distribution to beneficiary (P10,000 + P20,000) Exemption Net taxable income P1,050,000 P 30,000 50,000 80,000 P 970,000 102 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Tax on P500,000 Tax on excess (P470,000 x 32%) Income tax due and payable P125,000 150,400 P275,400 Problem 13 – 18B Note: Since the topic is tax planning and the requirement is tax savings, OSD can automatically assumed to be used to determine the lower tax Gross receipts 2009 Less: OSD (P300,000 x 40%) Net income before personal exemption Less: Personal exemption – basic Net income subject to income tax P300,000 120,000 P180,000 50,000 P130,000 Income tax when no income of estate was distributed (Case + Case 3) (P50,000 + P8,500) Less: Income tax when P150,000 of estate’s income was distributed (Case + Case 4) = (P27,500 + P27,500) Tax savings P 58,500 55,000 P 3,500 Supporting computations: Gross business receipts Distribution to the beneficiary Balance OSD – 40% Net income before personal exemption Personal exemption Net taxable income Income tax for first bracket Income tax on excess Case & 3: (160,000 – 140,000) x 25% Total income taxes Case Case Case Case 500,000 500,000 (200,000) 300,000 (50,000) 250,000 500,000 (150,000) 350,000 (140,000) 210,000 (50,000) 160,000 200,000 200,000 (80,000) 120,000 (50,000) 70,000 200,000 150,000 350,000 (140,000) 210,000 (50,000) 160,000 50,000 22,500 8,500 22,500 50,000 5,000 27,500 8,500 5,000 27,500 Problem 13 – 19 To minimize income tax, Dokling can the following: a Put his business under irrevocable trust b Use OSD instead of itemized deduction because the OSD is greater than the itemized deduction, and c Claim his child’s allowance as share from the income of the trust Tax exposure before the creation of trust: Gross income Less: OSD (P400,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income Tax on P140,000 Tax on excess (P50,000 x 25%) Income tax due P400,000 160,000 P240,000 50,000 P190,000 P22,500 12,500 P35,000 103 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Note: The allowance is not deductible because the child is not established as beneficiary of the trust Furthermore, the business is not in trust 50% of the business is created as trust: Grantor: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income P200,000 80,000 P120,000 50,000 P 70,000 Tax on P70,000 Trust: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200,000 x 40%) Distribution to beneficiary Net income before personal exemption Less: Personal exemption Net taxable income Beneficiary: Share from the income of trust Less: OSD (P100,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income ( 8,500) P200,000 P 80,000 100,000 P180,000 P 20,000 50,000 (P 30,000) P100,000 40,000 P 60,000 50,000 P 10,000 Tax on P10,000 ( Tax savings 500) P26,000 Problem 13 – 20 Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized deduction because using OSD can give a greater tax savings based on the given data of this case Rent income Less: OSD (P800,000 x 40%) Net income before personal exemption Less: Personal exemption Net income P 800,000 320,000 P 480,000 50,000 P 430,000 Tax on P250,000 Add: Tax on excess (P180,000 x 30%) Income tax due P 50,000 54,000 P104,000 Rent income – Property Less: OSD (P300,000 x 40%) Net income before personal exemption Less: Personal exemption Net income P 300,000 120,000 P 180,000 50,000 P 130,000 104 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Tax on P70,000 Add: Tax on excess (P60,000 x 20%) Income tax due Less: Income tax in No P 8,500 12,000 Rent income – Property Less: OSD (P500,000 x 40%) Net income before personal exemption Less: Personal exemption Net income P 500,000 200,000 P 300,000 50,000 P 250,000 ( 20,500) Tax on P250,000 ( 50,000) Tax savings P 33,500 Problem 13 – 21 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 P100,000,000 65,000,000 P 35,000,000 15,000,000 P 20,000,000 30% P 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 Y Co P10,000,000 30% P 3,000,000 30% P 3,000,000 Note: OSD is not applicable to co-ventures because their respective shares are already net of expense Problem 13 – 22 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 Income tax due b The share of joint venture partners X Co and Y Co is not P80,000,000 50,000,000 P30,000,000 10,000,000 P 20,000,000 30% P 6,000,000 105 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts 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 Y Co P10,000,000 30% P 3,000,000 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: 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 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 ... 97 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Add: Compensation income Total income before personal exemption... Problem 13 – 17 Income tax payable by the trust in 200x: 101 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Income. .. 150,000 100 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 13: Income Taxes of Partnerships, Estates & Trusts Net taxable income P300,000 Tax on P250,000 Tax on excess