If you want to minimize your income tax legally, you should know what the allowable deductible expenses in Philippines are. Because more expenses means lower income tax. But you should know that there are rules before you claim them as allowable deductible expenses for your business or your profession. And you will learn them after reading this article.
Listed below are the allowable deductible expenses in the Philippines that you can deduct from your gross income. You can use these if you choose itemized deduction over optional standard deduction (OSD).
If you don’t know the difference between Itemized Deduction and Optional Standard Deduction (OSD), you may read our previous article: Which is better, Itemized Deduction or Optional Standard Deduction (OSD)?
Allowable Deductible Expenses in the Philippines
- Advertising and Promotions
- Amortizations
- Bad Debts
- Charitable Contributions (To claim 100% deduction, donation should be made to BIR accredited donee)
- Commissions (This is subject to withholding tax)
- Communication, Light, and Water
- Depletion
- Depreciation (This should tally with the Depreciation schedules of your property, plant, and equipment (PPE))
- Director’s Fees (This is subject to withholding tax)
- Fringe Benefits (This is subject to withholding tax – final)
- Fuel and Oil
- Insurance
- Interest (This is subject to withholding tax – final and the taxpayer interest expense shall be reduced by 33% of interest income subject to final tax. Interest paid between members of family is not allowed.)
- Janitorial and Messengerial Services (This is subject to withholding tax – expanded)
- Losses (Losses from Sales or Exhanges of Property between members of a family is not allowed)
- Management and Consultancy Fee (This is subject to withholding tax – expanded)
- Miscellaneous
- Office Supplies
- Other Services
- Professional Fees (This is subject to withholding tax – expanded)
- Rental (This is subject to withholding tax – expanded)
- Repairs and Maintenance – Labor & Materials
- Repairs and Maintenance – Materials/Supplies
- Representation and Entertainment (Expenses are limited to .5% of net sales for seller of goods or 1% of net revenue for seller/provider of services)
- Research and Development
- Royalties (This is subject to withholding tax – final)
- Salaries and Allowances (This is subject to withholding tax – compensation)
- Security Services (This is subject to withholding tax – expanded)
- SSS, GSIS, Phil health, HDMF and Other Contributions (This should tally with your SSS, GSIS, Philhealth, and HDMF contributions of employer)
- Taxes and Licenses (Taxes that are deductible are usually percentage tax and local business taxes. Income tax, Value Added Tax (VAT), and tax penalties are not deductible)
- Tolling Fees
- Training and Seminars
- Transportation and Travel
- Others
Important Reminder
Before you claim the allowable deductible expenses for your business, these must meet the following criteria:
a) Related to the business or profession
Allowable deduction must be expenses that directly related to your business or profession. Personal expenses are not allowed.
b) Supported by substantiated documents
All allowable deduction must be supported by documents like official receipts, sales invoice, etc. that are registered with the BIR. Taxpayers name should be written in these supporting documents.
There is no need to attach this when you file your Income Tax Return. Just organize and sort receipts early on, so you will be ready and have evidences in case the BIR question your allowable deductible expenses.
c) Not contrary to law, public morals, policy and order
Bribes and Kickbacks are not allowed as deduction to your sales/receipts.
d) Reasonable in Amount
As you can see above, some of the expenses above have limitation on how much you can claim. Example of this is Representation and Entertainment expense which is based on .5%-1% of net sales/receipts.
If you choose OSD, your allowable deductible expense should not exceed 40% of Gross sales/receipts.
e) Complied with withholding tax requirements
There are some allowable deductible expenses above that you are required to withhold before you can deduct them to your gross income. Most commonly used are salaries and wages, rental, professional fees, contractors, and commissions.
No withholding means no deduction. Plus, you will be the one liable to the government.
Also, the taxpayer who chooses Optional Standard Deduction (OSD) is not excuse from withholding taxes to businesses or professional that are need to be withheld.
There you go, I hope that you learn something in this article.
If you can’t decide between Itemized deduction and Optional Standard Deduction (OSD), you may read our previous article. Which is better, Itemized Deduction or Optional Standard Deduction (OSD)?
If you have questions or comments. You can email or contact me by clicking here.
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