Tags: Tax Deductions Philippines, BIR Allowable Deductions, Business Expenses Deductible, NIRC Tax Guide, Tax Planning Philippines
One of the most effective ways for business owners in the Philippines to manage their tax liabilities is by understanding and properly applying allowable tax deductions under the National Internal Revenue Code (NIRC). These deductions can significantly reduce the taxable income of a business, thereby lowering the amount of tax payable to the Bureau of Internal Revenue (BIR). However, not all expenses qualify. Knowing what can and cannot be deducted is crucial for maintaining compliance and maximizing savings.
Here are the Top 10 Tax Deductions Every Business Owner Should Know, based on the NIRC of 1997, as amended, and relevant BIR revenue regulations.
1. Ordinary and Necessary Business Expenses
Under Section 34(A)(1) of the NIRC, a business may deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on or directly related to its trade or business. These include:
- Salaries and wages
- Rental payments
- Supplies
- Utilities
- Transportation and travel
- Representation expenses (subject to limitations)
However, expenses must be substantiated with official receipts (ORs) and other relevant documentation. Revenue Regulations No. 2-2014 reiterates the importance of proper documentation and bookkeeping.
2. Salaries, Wages, and Employee Benefits
Labor-related expenses such as salaries, wages, bonuses, 13th-month pay, and other benefits are deductible under Section 34(A)(1)(b), provided they are properly documented and subject to withholding tax.
Employers must also comply with BIR Revenue Regulations No. 8-2018, which outlines the withholding tax obligations on compensation. The Social Security System (SSS), PhilHealth, and Pag-IBIG contributions of employers are also deductible.
3. Interest Expense
Interest on loans used for business purposes is deductible under Section 34(B) of the NIRC. However, this is subject to a 20% reduction rule if the taxpayer earns interest income that is subjected to final tax.
For example, if a business has both interest expense and interest income, the interest expense must be reduced by 20% of the interest income subjected to final tax. This adjustment ensures that only net interest expenses are deductible.
4. Taxes and Licenses
According to Section 34(C), taxes and licenses paid or incurred in connection with the business operation are deductible. These include:
- Business permits
- Real property tax (RPT)
- Mayor’s permit fees
- Annual registration fee with BIR
Income tax and fringe benefit tax, however, are not deductible. Also, VAT payments are not deductible as expenses but can be claimed as input VAT credits, if applicable.
5. Depreciation of Property
Assets like buildings, vehicles, and equipment lose value over time. This loss in value can be claimed as depreciation under Section 34(F).
Businesses can choose among several depreciation methods, such as:
- Straight-line method
- Declining balance method
- Sum-of-the-years’ digits method
The method must be consistent and supported by the nature and usage of the asset. Also, Revenue Regulations No. 12-2001 guides on the estimated useful life of assets and acceptable methods.
6. Bad Debts
Under Section 34(E), bad debts that are actually written off during the taxable year are deductible, provided they meet the following conditions:
- Connected to the business or trade
- Actually charged off during the taxable year
- Not between related parties
- Proven to be uncollectible despite diligent collection efforts
Proper documentation and board resolution (for corporations) are needed to justify the write-off.
7. Charitable Contributions
Donations made to accredited non-governmental organizations (NGOs), government institutions, or religious institutions are deductible under Section 34(H), provided they meet certain conditions.
There are two types:
- Full deductibility, if the donation is made to a government entity or accredited NGO under Revenue Regulation No. 13-1998
- Limited deductibility, typically up to 10% of taxable income for individuals and 5% for corporations
Make sure to obtain a Certificate of Donation and proof of accreditation for the receiving organization.
8. Research and Development (R&D) Expenses
The NIRC allows reasonable R&D expenses as deductions if they are directly connected to the taxpayer’s business. These may be expensed outright or amortized over a period of not less than 60 months, under Section 34(G).
This includes:
- Product development costs
- Feasibility studies
- Process improvement initiatives
Keep detailed documentation of project costs and objectives to substantiate these claims.
9. Losses
Losses that are actually sustained and not compensated by insurance or indemnity may be deducted under Section 34(D). These include:
- Casualty losses (e.g., due to fire or typhoons)
- Theft or robbery losses
- Losses from obsolete inventory
For casualty and theft losses, the taxpayer must notify the BIR within 45 days from the date of loss to be eligible for deduction. Proper documentation and affidavits are essential.
10. Net Operating Loss Carry-Over (NOLCO)
Under Section 34(D)(3), net operating losses incurred in any taxable year may be carried over as a deduction from gross income for the next three consecutive taxable years following the year of such loss.
However, the 75% Interest Retention Rule must be observed: there must be no substantial change in ownership of the business. The Pandemic NOLCO extension to five years (under Bayanihan II) applied only to 2020 and 2021 losses.
Ensure proper filing and declaration of NOLCO on the income tax return (ITR) and financial statements.
Conclusion: Proper Tax Planning Is Stewardship
For Christian business owners, tax compliance is not just a legal obligation—it is also a matter of stewardship. The Bible teaches us to “Render therefore unto Caesar the things which are Caesar’s” (Matthew 22:21 KJV). Diligent and honest tax filing reflects our integrity and obedience not only to the government but also to God.
Understanding allowable deductions under the NIRC and BIR issuances empowers business owners to make better financial decisions, reduce tax burdens, and ultimately channel more resources into growing their business and serving their communities.
Whether you're a startup owner, a freelancer, or managing a growing enterprise, knowing these top 10 tax deductions helps ensure you only pay what is due—and nothing more.
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