RR No. 2-2010: Amends Sections 6 and 7 of RR No. 16-2008 with respect to the determination of the Optional Standard Deduction (OSD) of General Professional Partnerships and the partners thereof, as well as the manner and period for making the election to claim OSD in the Income Tax Returns

Key points

1. GPP as pass-through entity. A GPP is not a taxable entity for income tax, since its income is taxed to its partners.
2. GPP uses itemized deductions. Partners may still claim itemized deductions from their share, but not the same expenses the GPP already claimed. They may not claim the OSD from that share.
3. GPP uses OSD. Partners can no longer claim further deductions from their share in the GPP net income. The OSD is in lieu of itemized deductions and answers for both the GPP and its partners.
4. Other income of a partner. A partner with other gross income from trade, business or practice of profession follows the same type of deduction used for the partnership income. If the GPP opts for the OSD, the partner may still claim 40% of that other gross income, but not of the GPP share.
5. How the election is made. The OSD is up to 40% of gross sales or gross receipts for individuals under Sections 24(A) and 25(A)(1) of the NIRC, or 40% of gross income for corporations under Section 27(A) or 28(A)(1). The election is made by checking the box in the first quarter Income Tax Return, and it is irrevocable for that taxable year. No election means itemized deductions under Section 34, and so does failing to file the first quarter return.
6. Financial statements. An individual who claims the OSD does not have to submit financial statements with the return, but must keep records of gross sales or receipts. A corporation still submits financial statements with its annual Income Tax Return and keeps records of its gross income.

Who is affected

• General Professional Partnerships and their partners
• Individuals and corporations electing the OSD

Deadlines and effectivity

• OSD election: first quarter Income Tax Return of the taxable year
• Election is irrevocable for the taxable year