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What are the Allowable Tax Deductible Expenses from BIR?

Updated: Nov 8

Every business has its own Income and Expenses that needs to be monitored so you would know where your business is standing. However, not all expenses can be deducted for your taxes, and we have to observe certain tests and limitations in claiming expenses.


In theory, all of the concepts below have to be followed, but in the real world, not all comply. This is not only a test of skills and technical knowledge, but it is more a test of integrity.


5 Test and Limitations to observe in claiming Allowable Deductions

  1. Substantiation Requirements - all your expenses must be supported by an Official Receipt issued by your supplier.

  2. Reasonability - Every business has its own business expenses that are necessary to earn revenue. It must be reasonable in its ordinary course of business.

  3. Business Related - The expenses to be claimed as a deduction must be related to the business that you are running. Personal expenses are not allowed to be claimed as a deduction.

  4. Legality - Expenses to be claimed must be legitimate and legal by their very nature.

  5. Withholding Tax Requirements - Under itemized deductions, if a business expense is subject to a withholding tax, it must be withheld from its source and remitted to the BIR otherwise, it won’t be allowed to be claimed as a tax deduction.


Common Expenses subject to Withholding Tax:

  1. Salaries and wages

  2. Professional Fees

  3. Management Consultancy

  4. Rental

  5. Expense payments of Top 20,000 Corporations in the Philippines

Below are the list of Ordinary Allowable Itemized Deductions with their corresponding descriptions.

​Ordinary Allowable Itemized Deductions

Description

Cost of Goods Sold

Cost of Products / Services Sold

Advertising and Promotions

Cost in advertising within materials such as newspapers / magazines / television / radio / other forms of media

​Amortization

Cost of Deductions imposed on the allocation of intangible asset

Bad Debts

Refers to amount of uncollected receivables

​Charitable Contributions

​Charitable Contributions

These are charitable contributions made by individuals.

Note: Donations should be made to BIR accredited donee institutions, otherwise individual taxpayers can only claim 10% of the donation as deductible

Commissions

These are fees paid to a sales personnel, in exchange for his/her services

Note: A portion of expenses must be withheld and paid to BIR.

Communication, Light and Water

Itemized deductions for important utilities such as light, water and telecommunication

​Depletion

Costs acquired from extraction of natural resources (e.g. oil, minerals, timber, etc.)

Depreciation

Reduction in value of asset, such as equipment, buildings and other improvements

Director's Fees

Cost acquired for services rendered by members of the Board of Directors

​Fringe Benefits

Extra benefits that serve as additional compensation given to employees (e.g bonus, privilege etc.)

Fuel and Oil

Cost acquired for usage of gasoline, oil and other petroleum products

​Insurance

​Refers to the cost of premiums on insurances

​Interest

Cost imposed on the use of borrowed money

(Note: The taxpayer’s allowable deduction for interest expense shall be reduced by an amount equal to the 33% of the interest income subjected to final tax. Moreover, all interest incurred or paid to related parties cannot be claimed as deductions to income)

Janitorial and Messengerial Services

The cost of janitorial services under contract with the government

Losses

Refers to any decrease in net income

Management and Consultancy Fee

Cost on hiring consultants for special and technical services

Note: A portion of expenses must be withheld and paid to BIR.

Miscellaneous

​Other amounts that were classified under specific confidential, intelligence and extraordinary expense accounts

Office Supplies

Cost for office supplies (including janitorial) whether issued or used

Other Services

Refers to cost acquired from doing additional services

Professional Fees

Taxes on individuals engaged in exercise/practice of their professions

Note: A portion of expenses must be withheld and paid to BIR.

​Rental

Amounts that were advanced/deposited for the lease/rental of a specific property

Note: A portion of expenses must be withheld and paid to BIR.

​Repairs and Maintenance - Labor or Labor & Materials

Cost acquired upon the repair and maintenance of business assets

Repairs and Maintenance - Materials/Supplies

Cost of repairing and maintenance of materials/supplies

​Representation and Entertainment

​Refers to expenses that were used in entertaining guests/employees

Note: Limited to 0.5% of net sales for sellers of goods or 1% of net revenue for seller/provider of services.

​Research and Development

Cost acquired upon the search for knowledge and converting that knowledge into new product/process

Royalties

Refers to amounts given by the licensee for use of assets, as owned by the licensor.

Salaries and Allowances

Pay proper and other forms of allowances given within the taxable year

Note: A portion of expenses must be withheld and paid to BIR.

Security Services

Cost of security services that are under contract with the government

Note: A portion of expenses must be withheld and paid to BIR.

SSS, GSIS, Philhealth, HDMF and Other Contributions

Refers to contributions made to government agencies such as SSS, PhilHealth, etc. Note: A portion of expenses must be withheld and paid to BIR.

​Taxes and Licenses

Amount of expenses for taxes, duties and, licenses

​Tolling Fees

Fees for usage of roads / bridges / ferries / piers and terminals

Training and Seminars

Fees for training, conducted seminars, events, etc.

Transportation and Travel

Expenses incurred from travel, including transportation

Others

Other expenses are to be deducted as authorized by the BIR


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Disclaimer: This article or blog is only for general knowledge and guidance and is not a substitute for an expert opinion. For technical advice, please consult your tax / legal advisor for your specific business concerns. For comments, suggestions, and feedback, feel free to email us at consult@upcloudaccounting.com.


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