Business deductions in the Philippines enable companies and sole proprietors to deduct ordinary and necessary operating expenses from their gross income, thereby significantly reducing corporate income tax (ranging from 20-25% under the CREATE Act) or personal income tax liabilities, provided they are properly documented and compliant with BIR regulations.
Maximizing these deductions requires understanding Section 34 of the National Internal Revenue Code (NIRC), which mandates that expenses be ordinary (common in the trade), necessary (helpful/appropriate), incurred in the taxable year, and substantiated by official receipts or equivalent documents to withstand BIR audits.
Core Principles Governing Business Deductions
The foundation of all business deductions lies in the BIR’s strict four-part test, ensuring that only legitimate operational costs qualify, rather than personal or capital expenditures.
Expenses must be “ordinary and necessary” as defined in BIR rulings and jurisprudence—ordinary meaning accepted in the taxpayer’s industry, necessary meaning conducive to business without being lavish—and must occur within the taxable year while supported by invoices showing BIR permit numbers, dates, amounts, and payee TINs.
Revenue Memorandum Circulars like RMC 81-2025 further clarify that deductions apply primarily to active trade/business income, not passive sources (e.g., interest, dividends), requiring careful allocation for mixed-income entities to avoid disallowances during tax assessments.
Amortization of Intangible Assets as Business Deductions
Amortization deductions spread the cost of acquired intangibles like patents, trademarks, copyrights, franchises, or software over their useful lives, providing predictable annual tax relief.
Under NIRC Section 34(F), businesses deduct a ratable portion annually (e.g., straight-line over 5-20 years depending on asset type), supported by acquisition contracts, amortization schedules, and proof of ongoing business use; for instance, a ₱1,000,000 trademark amortized over 10 years yields ₱100,000 annual deductions.
This non-cash deduction benefits tech firms, franchisors, and IP-heavy operations, with BIR allowing adjustments for impairment or early obsolescence when properly documented through financial statements and board resolutions.
Depreciation Deductions for Fixed Assets and Equipment
Depreciation allocates the cost of depreciable assets like machinery, vehicles, office equipment, and buildings over their useful lives, offering substantial non-cash reductions in taxable income.
BIR Revenue Regulations No. 2-40 prescribe rates ranging from 4.5 % to 5% for non-residential buildings, 20% for computers/office machines, 20-33% for transportation equipment, and 10-20% for production machinery, with straight-line or declining balance methods available upon BIR approval.
Companies claim these via itemized schedules in annual income tax returns (BIR Form 1702), backed by asset registers, purchase invoices, and depreciation worksheets, making it essential for capital-intensive sectors like manufacturing, logistics, and construction.
Employee Compensation and Mandatory Contributions
Salaries, wages, bonuses, commissions, and employer contributions to SSS, PhilHealth, and Pag-IBIG qualify as fully deductible business expenses when ordinary, necessary, and documented through payroll records and remittances.
Employer shares (e.g., 8.5-14.7% for SSS depending on salary bracket, 4.5-5% for PhilHealth, 2% for Pag-IBIG) are deductible provided remitted on time, while fringe benefits for rank-and-file employees (e.g., rice allowances, medical reimbursements) are 100% deductible, unlike managerial fringes subject to 35% fringe benefit tax (grossed-up monetary value still deductible).
Payroll journals, BIR Form 1601C remittances, and annual BIR Form 2316 certificates substantiate these claims, with 13th-month pay up to ₱90,000 de minimis non-taxable and fully deductible.
Rent, Utilities, Supplies, and Marketing Expenses
Day-to-day operating costs like office/factory rent, electricity/water/internet bills, office supplies, and promotional expenses rank among the most straightforward business deductions.
Rentals require lease contracts and official receipts, prorated for home offices by business-use square footage; utilities and supplies need itemized invoices tied to operations, while marketing (ads, trade fairs, samples) deducts fully if promoting the trade, capped at reasonable amounts per BIR norms.
Travel expenses for business trips (airfare, hotel, per diems) qualify with liquidation reports and receipts, subject to a 50% meals/entertainment disallowance unless fully substantiated.
Interest on Business Loans and Financing Costs
Interest paid or accrued on loans specifically for business purposes—working capital, asset purchases, expansions—serves as a key deductible expense under NIRC Section 34(B).
Deductibility requires loan agreements linking funds to business use, amortization schedules, and bank statements; however, interest income taxpayers face a 20% disallowance on interest deductions, and related-party loans trigger thin capitalization rules (debt-to-equity >3:1 may disallow excess).
Bank charges, guarantee fees, and documentary stamp taxes on loans also qualify when directly tied to financing operations.
Bad Debts Write-Offs and Provisioning Rules
Uncollectible receivables from trade customers become deductible bad debts after exhausting collection efforts and confirming worthlessness.
NIRC Section 34(E) requires debts previously included in gross income, reasonable collection attempts (demand letters, legal actions), and proof like bankruptcy filings or insolvency affidavits; actual recoveries in later years become taxable income.
Allowance for doubtful accounts (reserves) may deduct up to 5% of receivables for certain taxpayers, substantiated by aging analyses and historical loss rates.
Professional Fees, Taxes, Licenses, and Donations
Fees for accountants, lawyers, consultants, auditors, and management services are fully deducted when ordinary/necessary and BIR withholding tax (1-10% depending on payee) is remitted timely.
Business taxes/licenses (real property, local business tax except income tax), regulatory fees, and charitable donations to accredited donees (up to 5% taxable income for government, 10% for NGOs) qualify with certificates and receipts; R&D/training costs often receive 150% enhanced deductions under incentives.
| Deduction Category | Examples | Key Documentation |
| Amortization/Depreciation | Patents, machinery | Schedules, invoices |
| Employee Costs | Salaries, SSS shares | Payroll, remittances |
| Operating Expenses | Rent, utilities, ads | ORs, contracts |
| Interest/Bad Debts | Loans, write-offs | Agreements, proofs |
| Professional/Donations | Consultants, charities | WT forms, certificates |
Essential Documentation Standards for All Deductions
BIR audits disallow unsubstantiated claims, imposing 25-50% penalties plus 12-20% interest, making robust record-keeping non-negotiable.
Official receipts/invoices must show BIR permit/TIN, date, amount, description, and payor details; digital alternatives (eFPS, CAS/POS) require accreditation; journals and ledgers preserve chronological records for 3-10 years per BIR rules.
Third-party corroboration (bank statements, contracts) strengthens claims during Letters of Authority (LOA) examinations.
Itemized vs. Optional Standard Deduction Choices
Taxpayers elect annually between itemized deductions (actual expenses) or Optional Standard Deduction (OSD: 40% gross sales/receipts, no documentation needed).
Itemized favors high-cost industries; OSD simplifies for service/low-asset firms but caps relief; election is irrevocable per return, with non-residents taxed on gross (no deductions).
CREATE Act Enhancements to Business Deductions
The CREATE MORE Act preserves core deductions while adding power expense deductions (100% for registered firms), extended incentives (ITH up to 17 years), and reduced CIT (20% domestic market, 25% others).
BOI/PEZA registration unlocks VAT zero-rating, duty-free imports (deductible costs), and enhanced deductions for training and R&D.
Avoiding Common Audit Triggers on Business Deductions
BIR flags disproportionate expenses, missing TINs on receipts, late remittances, and passive/active misallocation.
Mitigate via monthly reconciliations, digital accounting (Xero/QuickBooks), pre-filing reviews, and tax advisors for complex claims like related-party transactions or enhanced deductions.
Key Takeaways
Business deductions, ranging from depreciation and salaries to interest and professional fees, reduce taxable income when aligned with the BIR’s ordinary/necessary tests and supported by impeccable records.
Proactive planning, segregation of income streams, and CREATE incentives position compliant firms for optimal savings amid 6%+ GDP growth.
Is Assistance Available?
Yes. Consult our team of experts at BusinessRegistrationPhilippines.com for tailored deduction strategies, BIR filings, and audit defense to ensure every peso spent reduces taxes legally:
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