Business deductions in the Philippines enable companies to legally reduce their taxable income by subtracting ordinary and necessary expenses directly related to operations, thereby lowering corporate income tax liabilities that range from 20– % to 25%, depending on the entity’s size and regime.
Properly documenting and claiming these deductions requires an understanding of the BIR rules under Section 34 of the National Internal Revenue Code, which mandates that expenses be ordinary, necessary, paid, or incurred in the taxable year, and supported by official receipts.
Core Principles of Deductible Business Expenses
Business deductions must meet strict BIR criteria to qualify, ensuring only legitimate operational costs reduce taxable income rather than personal or non-business spending. The four key tests are: the expense must be ordinary (common in the taxpayer’s trade), necessary (helpful and appropriate), incurred during the taxable year, and substantiated by invoices or records.
Recent BIR guidance in Revenue Memorandum Circular No. 81-2025 clarifies that deductions apply only to expenses linked to active business income, not passive sources like interest or dividends, requiring careful segregation of costs.
Amortization of Intangible Assets
Amortization spreads the cost of intangible assets like patents, trademarks, copyrights, or software licenses over their useful life, allowing annual deductions that lower taxable income progressively. Businesses can deduct a portion of the acquisition cost each year as long as the asset serves the trade or profession and retains value, with methods prescribed by BIR regulations.
For example, a company acquiring a trademark for ₱500,000 with a 10-year life deducts ₱50,000 annually, supported by amortization schedules and proof of business use.
Depreciation of Fixed Assets
Depreciation allocates the cost of tangible fixed assets such as machinery, vehicles, buildings, or equipment over their estimated useful lives, providing non-cash deductions that reflect wear and tear. BIR allows straight-line, declining balance, or other approved methods, with rates varying by asset class (e.g., 5% for buildings, 20% for computers).
This deduction reduces net taxable earnings without cash outflow, essential for capital-intensive operations like manufacturing or logistics firms.
Employee Compensation and Fringe Benefits
Salaries, wages, bonuses, and fringe benefits like health insurance, retirement contributions, or education allowances qualify as business deductions when ordinary, necessary, and properly documented. Employer contributions to SSS, PhilHealth, and Pag-IBIG are also deductible, provided they align with statutory rates and remittance deadlines.
Fringe benefits given to rank-and-file employees are fully deductible, while those for managerial staff may trigger fringe benefit tax, but the grossed-up cost remains claimable.
Rent, Utilities, and Office Supplies
Rent for office or production space, utilities (electricity, water, internet), and everyday supplies like paper, ink, or furniture are standard business deductions if tied to operations and backed by official receipts. For home offices, only the allocable portion used exclusively for business qualifies, calculated by square footage or time usage.
Marketing expenses such as social media ads, print materials, or event promotions are also fully deducted as promotion of trade.
Interest Expense on Business Loans
Interest paid on loans used for business purposes—like working capital, equipment purchase, or expansion—is deductible, subject to limitations such as a 20% reduction if the borrower has interest income subject to final tax. Documentation includes loan agreements, payment proofs, and evidence linking funds to business use.
This deduction supports leveraged growth, common in SMEs financing inventory or machinery.
Bad Debts and Uncollectible Receivables
Bad debts from customers unable to pay, after reasonable collection efforts and issuance of official receipts, can be written off and deducted once proven uncollectible (e.g., via bankruptcy or affidavit). BIR requires the debt to have been previously included in income and supported by aged receivables reports.
Recovery of previously written-off bad debts becomes taxable income in the year received.
Taxes, Licenses, and Professional Fees
Business-related taxes (except income tax itself), licenses, permits, and fees for consultants, lawyers, accountants, or auditors are deductible when ordinary and necessary. Management fees, cleaning services, and regulatory compliance costs also qualify with proper withholding tax compliance where applicable.
Charitable donations to BIR-accredited donees are deductible up to 5-10% of taxable income, depending on the recipient type.
| Deduction Category | Examples | Key BIR Requirements |
| Amortization/Depreciation | Patents, machinery | Useful life schedule, receipts |
| Employee Costs | Salaries, SSS contributions | Payroll records, remittances |
| Operating Expenses | Rent, utilities, supplies | Official receipts, business use |
| Interest/Bad Debts | Loan interest, write-offs | Loan docs, collection proof |
| Professional Fees | Consultants, audits | BIR withholding compliance |
Documentation Requirements for All Deductions
Every business deduction demands sufficient evidence under BIR rules, typically official receipts (ORs), invoices, contracts, or vouchers showing amount, date, payee, and BIR permit number. Lack of documentation leads to disallowance during audits, plus penalties up to 50% of underpaid tax plus 20-25% interest.
Digital records and accounting software aid tracking, but manual receipts remain essential for smaller firms.
Itemized Deductions vs. Optional Standard Deduction
Businesses have the option to choose between itemized deductions (actual expenses) or the Optional Standard Deduction (OSD), which is 40% of gross income, and is irrevocable on an annual basis. Itemized suits high-expense firms like manufacturing; OSD simplifies for low-documentation service businesses.
Non-resident foreign corporations cannot claim deductions, and are taxed on gross income.
Ordinary and Necessary Expense Test
BIR’s RMC 81-2025 defines “ordinary” as common/accepted in the trade and “necessary” as appropriate/helpful, not extravagant. Expenses must connect directly to active trade/business income, excluding passive sources.
Courts interpret based on industry norms, rejecting personal or unrelated costs.
Special Rules for Passive Income Expenses
Expenses generating passive income (such as dividends, and interest) are not deductible against active business income, as per recent BIR clarifications, requiring an allocation. Mixed businesses segregate costs carefully to avoid disallowances.
Research, Development, and Training Costs
R&D and employee training expenses are fully deductible if ordinary/necessary, with enhanced 150% deductions possible under incentives for registered activities. Documentation includes program details and business linkage.
Impact of the CREATE Act on Deductions
The CREATE Act maintains core deductions but introduces enhanced ones (e.g., power expense deductions) for qualifying firms, alongside reduced CIT rates. Registered enterprises access ITH or special rates via BOI/PEZA.
Common Audit Triggers and Avoidance
BIR audits often target patterns suggesting improper deductions, but proactive practices minimize risks during tax reviews.
- Missing or invalid official receipts lacking BIR permit numbers or taxpayer IDs.
- Disproportionate expenses relative to revenue (e.g., high marketing vs low sales).
- Failure to segregate passive and active income expenses per RMC 81-2025.
- Round-figure or personal-looking transactions without business linkage.
- Late remittances or inconsistent SSS/PhilHealth filings, signaling poor records.
Monthly reconciliation of books, digital tracking tools, and annual pre-filing reviews catch issues early, while engaging tax professionals for complex claims ensures BIR-compliant documentation that withstands scrutiny.
Final Insights
Business deductions in the Philippines—from amortization and depreciation to salaries, utilities, and professional fees—offer substantial tax relief when they meet BIR’s ordinary, necessary, and documented standards, directly cutting taxable income under itemized or OSD regimes.
Entrepreneurs maximize savings by tracking all eligible costs year-round, segregating active and passive expenses per recent BIR guidance, and maintaining ironclad documentation to withstand audits and secure legitimate reductions.
Is Assistance Available?
Yes. Review your expense records now, ensure BIR-compliant documentation for every claim, and consult our professionals to maximize savings while minimizing audit risks under current rules:
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