Deductible Expenses
Under the National Internal Revenue Code of the Philippines, valid business expenses may be deductible from the gross income in order to legally reduce a taxpayer’s taxable income. Understanding the concept of deductible expenses is of paramount importance especially to those who are engaged in a business. After all, business expenses are necessarily incurred in order to earn a profit. In this regard, these allowable deductions become tools by which taxpayers can equitably measure the net income that the taxpayers earn from their respective business undertakings.
As a rule, an expense may be deducted from the income if the following requisites concur: (1) the expenses must be ordinary and necessary, (2) it must have been paid or incurred during the taxable year, (3) it must have been paid or incurred in the trade or business of the taxpayer, and (4) it must be substantiated by receipts, records and other pertinent papers. In addition, if the expense is subject to withholding tax, the same must be paid and remitted to the Bureau of Internal Revenue (BIR).
The deductible business expenses must likewise be legitimate and legal. This requirement is necessary in order to avoid the manipulation of business expenses to lower down income taxes or to encourage illegal activities in the operation of one’s business. As such, facilitation fees such as bribes and kickbacks to corrupt public officials are not allowed as deductible business expenses.
The common allowable deductions from gross income under the National Internal Revenue Code of the Philippines include the following:
- Bad debts
- Depreciation
- Depletion
- Taxes
- Research and Development Costs
- Interest
- Pension Trust Contributions
- Charitable and other contributions
- Ordinary and Necessary Expenses
- Losses
These deductions are available to individual and corporate taxpayers provided that the individuals are not purely compensation earners and that the corporations are not non-resident foreign corporations; provided, further, that they do not choose to avail of the Optional Standard Deduction (OSD) of forty percent (40%) of the gross income. It is worth noting that the income of non-resident foreign corporations is taxed at gross. Hence, they are not allowed any deduction.
