Running a business in the Philippines involves many responsibilities, including complying with tax regulations. Fortunately, the government provides various ways for businesses to legally reduce their tax burden. One of the most effective is to lower your taxes is through tax deductions. We’ll explain what tax deductions are, their benefits, the allowable deductions in the Philippines, and how to claim them for business expenses.
What Is a Tax Deduction?
A tax deduction is an allowable expense that businesses can subtract from their gross income to reduce their taxable income.. By deducting eligible costs, a business pays tax only on its net income (gross income minus allowable expenses), which can significantly reduce the overall tax due.
Tax deductions are different from tax credits, which reduce your tax liability directly. Deductions affect how much of your income is taxable, while credits reduce the tax you owe after the calculation.
Allowable Tax Deductions for Business Expenses in the Philippines
The BIR allows businesses to claim a wide range of ordinary and necessary expenses as deductions. These are costs that are directly related to the operation of your business. Below are some of the most commonly allowed deductions:
- Salaries and Wages
Payments made to employees, including mandatory government contributions such as SSS, PhilHealth, and Pag-IBIG, are deductible. - Rent Expenses
If you lease office or commercial space, your monthly rent payments can be claimed as deductions. - Utilities
Electricity, water, internet, and communication expenses related to your business operations are deductible. - Professional Fees
Payments to consultants, lawyers, accountants, and other professionals for services related to your business are allowable deductions. - Depreciation
The declining value of tangible assets like computers, office equipment, and vehicles over time can be claimed through depreciation. - Repairs and Maintenance
Necessary repairs on equipment, buildings, or vehicles used for business purposes are deductible. - Travel and Transportation
Local and international travel expenses related to business activities, such as attending conferences or meeting clients, can be claimed—provided they are properly documented. - Training and Seminars
Costs incurred in upskilling employees through workshops, seminars, or online courses may also be deducted. - Taxes and Licenses
Certain taxes paid during the course of doing business (except income tax itself) and fees for business permits or licenses are deductible.
Determining what qualifies as an allowable tax deduction can be confusing. To ensure compliance and maximize your savings, seek assistance from a professional tax consultation service.
Optional Standard Deduction (OSD) vs. Itemized Deductions
Philippine businesses have two options for claiming deductions:
- Itemized Deductions: This method allows you to list and deduct all actual business expenses, provided they are supported by proper documentation such as official receipts, invoices, and contracts.
- Optional Standard Deduction (OSD): Instead of itemizing each expense, the OSD allows you to deduct a fixed percentage—40% of your gross sales or gross receipts—without the need for detailed proof of expenses. This is ideal for small businesses or professionals who want a simpler method of deduction.
You can only choose one method per taxable year, and once you’ve filed using one method, you can’t switch until the next tax year.
How to Claim Tax Deductions for Business Expenses
Here are the basic steps for claiming tax deductions in the Philippines:
- Keep Proper Records
Maintain accurate bookkeeping and keep all official receipts, invoices, and contracts. These will serve as evidence in case the BIR audits your business. A professional bookkeeping outsourcing service can assist you with accurately recording and maximizing your deductions. - Choose Your Deduction Method
Decide whether to go with Itemized Deductions or the OSD. Choose the one that gives you the most tax savings and fits your record-keeping capacity. - File the Correct Tax Forms
- Use BIR Form 1701 for sole proprietorships.
- Use BIR Form 1702 for partnerships and corporations.
Make sure to indicate your chosen deduction method and include all relevant schedules.
- Submit Before the Deadline
Annual income tax returns are due by April 15 of the following year for individuals and partnerships, or the 15th day of the fourth month after the fiscal year for corporations. Quarterly returns have specific deadlines based on the business’s fiscal calendar. Don’t be late or you’ll face costly penalties. - Seek Professional Help
Enlisting a professional tax consultation service ensures compliance and maximizes your tax deduction savings. They can also assist with audits and BIR inquiries.
Final Thoughts
Understanding tax deductions isn’t just about compliance—it’s a smart financial move that can help your business thrive. Keep your records clean, fill out the correct forms, and submit your taxes on time. When in doubt, seek help from a professional tax consultation service to ensure you’re getting the most out of your allowable deductions.
Need to Check if Your Business is Compliant? Find Help Here.
The Business Registration Philippines team offers legal and accounting services to help you with tax compliance. Outsourcing many of your bookkeeping, payroll, auditing, and other tasks to us is often more cost-effective than expanding your in-house accounting team. Reach out today to schedule an initial consultation with one of our experts.
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