Can a GPP Elect the Optional Standard Deduction? The Once-Only Rule Under RR No. 2-2010

A General Professional Partnership (GPP) can elect the Optional Standard Deduction (OSD) when computing its net distributable income — but under Revenue Regulations (RR) No. 2-2010, that 40% deduction can only be claimed once: either by the GPP itself, or separately by each partner against their own distributive share, never both. This “once-only” rule determines how much income a partner in a law firm, accounting firm, or medical group actually reports and pays tax on, and it’s a distinct question from whether the GPP owes income tax at all or how it withholds on what it pays partners.

What is the once-only rule for OSD at a GPP? #

A GPP and its partners cannot both claim the 40% Optional Standard Deduction on the same stream of income — the deduction is available at only one level of the two-tier structure. Revenue Regulations No. 2-2010, amending Sections 6 and 7 of RR No. 16-2008, addresses the specific problem created when a GPP’s income passes through to individual partners: without a once-only limitation, the 40% deduction could effectively be claimed twice on the same peso of income — once when the GPP computes its net income, and again when each partner computes their own taxable income from their distributive share.

The mechanic works as follows:

• If the GPP elects OSD at the partnership level, it deducts 40% of its gross income to arrive at net distributable income. Each partner’s distributive share is computed from that already-reduced figure, and the partner reports that share as gross income without claiming OSD again — the 40% has already been applied once, at the entity level.
• If the GPP instead uses itemized deductions to compute its net income, each partner’s distributive share flows through without any GPP-level standard deduction baked in. Each partner may then individually elect OSD — 40% of their own distributive share — or itemize their own personal expenses related to their professional practice, when filing their own income tax return.

Put simply: the 40% standard deduction is a single toggle for each income stream, not a benefit either party can independently switch on.

Why does NIRC Section 34(L) matter here even though it isn’t GPP-specific? #

Section 34(L) of the National Internal Revenue Code (NIRC) is the general OSD provision that applies to individuals and corporations broadly, and its irrevocability rule is what makes the GPP-level choice consequential rather than a formality. The provision states:

“In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts… Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made.”

Section 34(L) of the National Internal Revenue Code (NIRC), as amended.

This general rule is what RR No. 2-2010 layers the GPP-specific mechanic on top of. Because an OSD election is locked in for the full taxable year once signified in a return, the GPP’s choice — OSD or itemized, made when it computes its net income for the year — is not something it or its partners can revisit mid-year. A partner filing a personal return later in the year inherits whichever state the GPP already locked in: either an income stream that already reflects a 40% entity-level deduction, or a raw distributive share still open to the partner’s own OSD election.

Worked example: a three-partner law firm GPP #

Assume a law firm organized as a GPP with three equal partners has ₱6,000,000 in gross receipts for the year, with no other GPP-level itemized expenses assumed, for simplicity. The two available paths produce materially different outcomes for each partner.

In Path A, each partner reports and pays tax on the full ₱1,200,000 distributive share — there is no second 40% deduction available to the partner, because the GPP already applied OSD once at the entity level. In Path B, each partner receives a larger raw distributive share (₱1,500,000, since the GPP’s itemized deductions were lower than 40% would have been) but then has the option to apply their own 40% OSD against it, bringing their reportable taxable income down to ₱900,000 — or to itemize their own personal professional expenses instead, if those exceed ₱600,000.

Which path produces a lower combined tax burden depends on how the GPP’s actual itemized expenses compare to 40% of gross receipts, and separately on each partner’s own expense profile — the same trade-off covered generally in Optional Standard Deduction (OSD) vs. Itemized Deductions: Which Should You Choose?, applied here across two tiers instead of one.

How does this interact with the GPP’s other filing obligations? #

The OSD election a GPP makes affects only how its net distributable income is computed — it does not change whether the GPP itself owes income tax, or how it withholds on payments to partners. A GPP remains exempt from income tax at the entity level regardless of which deduction method it elects; see How GPP Partners Report and Pay Income Tax on Their Distributive Share for how that pass-through exemption works and how each partner reports their share on their own return. Separately, drawings and advances the GPP pays to partners during the year remain subject to creditable withholding tax, and the GPP still issues BIR Form 2307 to each partner regardless of whether OSD or itemized deductions were used to compute net income — see Withholding Tax on GPP Professional Fees: Is a Law Firm Partnership Subject to BIR Form 2307? for the withholding mechanics on those distributions.

Frequently asked questions #

Can a General Professional Partnership (GPP) elect the Optional Standard Deduction? #

Yes. Under Revenue Regulations No. 2-2010, a GPP may elect the Optional Standard Deduction (OSD) — 40% of its gross income — when computing its net distributable income at the partnership level, instead of itemizing its business expenses.

If the GPP already elected OSD, can a partner also claim OSD on their distributive share? #

No. Once the GPP elects OSD at the partnership level, each partner’s distributive share is already net of that 40% deduction, and the partner cannot claim OSD again on the same income — the once-only rule under Revenue Regulations No. 2-2010 prevents a double 40% deduction on one stream of income.

If the GPP uses itemized deductions instead, can each partner still elect OSD individually? #

Yes. If the GPP computes its net income using itemized deductions rather than OSD, each partner may then individually elect the Optional Standard Deduction — 40% of their own distributive share — when filing their own income tax return, or itemize their own personal professional expenses instead.

Is the OSD election irrevocable once made? #

Yes. Under Section 34(L) of the NIRC, an OSD election signified in a return is irrevocable for the taxable year for which that return is made, whether the election is made by the GPP at the partnership level or by an individual partner on their own return.

Summary #

A GPP’s OSD election is a once-only choice under Revenue Regulations No. 2-2010: the 40% deduction can be taken at the partnership level, or by each partner individually on their distributive share, but never at both levels on the same income. Electing OSD at the GPP level produces a smaller, already-reduced distributive share that partners report as-is; electing itemized deductions at the GPP level passes through a larger raw share that each partner can then reduce with their own 40% OSD election. Either way, the election — once signified in a return — is irrevocable for that taxable year under Section 34(L) of the NIRC, so the GPP should run both computations before its first return of the year is filed.