April 15 is fast approaching, and if you have taxable income, you need to file and pay your income tax before that due date. In computing your income tax, you need to determine your deductible costs and expenses to arrive at your net taxable income. In doing the computation, we should be careful to claim only those expenses that are considered as allowable deductions. We should also remember that there are differences between the treatment of expenses in conformity with the Philippine Accounting Standards (PAS) and the National Internal Revenue Code (NIRC). In financial accounting, expenses are recognized as they accrue, while in taxation they can be recognized when actually paid. Thus you cannot just deduct to your gross taxable income all the expenses you incur within the taxable year. The following are tips and things you should consider when claiming expenses as deductions against your taxable income.
1. Personal, living or family expenses. As a general rule, expenses can only be claimed if they are paid or incurred as part of the profession, trade or business operations of the taxpayer. Hence, personal expenses, living or family expenses are not deductible.
3. Substantiation Requirements. No expenses shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (a) the amount of the expense being deducted, and (b) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.
4. Bribes, Kickbacks and Other Similar Payments. No deduction from gross income shall be allowed for any payment made to an official or employee of the national, local or foreign government or similar entities if the payment constitutes a bribe or kickback. In other words, expenses done illegally are not allowed as deductions to your taxable income.
5. Losses and interest incurred/paid to related parties. Losses from Sales or Exchanges of Property and interest paid or incurred on transaction between the following are not allowed to be claimed as deductions to income.
a) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or
b) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or
c) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;
d) Between the grantor and a fiduciary of any trust; or
e) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or
f) Between a fiduciary of a trust and beneficiary of such trust.
6. Interest expense (tax arbitrage). There are exception and limitations on the amount of interest expense that can be deducted from income. 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 (please read no 5 above).
7. Bad debts expense. Bad debts expense are only deductible when actually ascertained to be worthless and charged off within the taxable year. Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.
8. Taxes. The following taxes are not deductible to your income for the purpose of computing income tax:
a) The Philippines income tax
b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of credit against tax for taxes of foreign countries
c) Estate and donor’s taxes; and
d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
9. Entertainment, amusement and recreation expenses. There is a limit in claiming expenses on Entertainment, amusement and recreation (EAR). EAR expenses are limited to 0.5% of net sales for sellers of goods or 1% of net revenue for seller/provider of services. For sellers of both goods or properties and services an apportionment formula is used in determining the ceiling on such expenses.
To learn more about allowable deductions and personal / additional exemptions in computing for your income tax, please read our follow-up article “What are Deductions and Exemptions to Income Tax in the Philippines“.
Disclaimer: The above list of tips is for informational use only. To learn more about allowable deductions, you may read “Chapter VII (Allowable Deductions) of the NIRC, as amended”. There may also other things that should be considered when claiming deductions to your taxable income. Furthermore, this article is intended for taxpayers who are claiming itemized deductions instead of the optional standard deductions in computing for income tax. New laws, BIR issuances, regulations and rulings may render this post obsolete or incorrect. For more information, please visit the BIR website or office for updated information.
Source: Chapter VII (Allowable Deductions) of the NIRC, as amended
Victorino Q. Abrugar is a marketing strategist and business consultant from Tacloban City, Philippines. Vic has been in the online marketing industry for more than 7 years, practicing problogging, web development, content marketing, SEO, social media marketing, and consulting.
is municipal taxes deducted to your income?
No.
hi,
how can we determine the useful lives of assets for depreciation? can we just make it up ourselves or we need to inform BIR? are penalties for non filing / paying of withholding and percentage taxes allowable deductions? Thanks!
Hi Vic, i-up ko lang to. Gusto ko rin kasi malaman ang sagot sa tanong niya. Thanks.
where do I include the personal expenses of the taxpayer?
is business tax(vat) a deductible expenses??
VAT is not a deductible expense. VAT is a transferable tax; it can be passed on to buyers/customers by including VAT to your selling price. So you can’t declare it as your own expense.
Sir, how about the Percentage Tax (3%) is it a deductible expense?
Yes, you can deduct % tax from gross income as expense, if you are claiming itemized deductions..
percentage tax are not expenses, they will become your creditable taxes..
Thats actually my question… 2551m is a tax paid thats why its called monthly percetage tax, right? Itemized deduction should be expenses. The taxes referred to in itemized deduction are licenses, registration fees, and in general are expenses, and not derived from the gross salary, right?
What is the correct treatment for % tax? Some says as deductible expense, some as creditable tax against income tax due… Im not getting it? pls clarify..
Thank you so much
Hi S’
Could i immediately claim the basic and additional deductions in the Qtrly Income tax return if i am earning purely on business?
where will i put it in the 1701Q Qrly return?
Thanks
No. You can’t immediately claim basic and personal exemption in computing quarterly income tax (1701Q). You only claim that on computing your annual income tax (1701). That is why you don’t see it in the 1701Q.
Hi Vic,
I’m an engineer and had worked for an international IT company from 2006 to 2009 (almost 4 years). The company has paid my taxes diligently during that period.
I resigned on Dec 2009 to get out of my comfort zone and explore many things outside employment. I’ve attended seminars, tried some networking business, etc. I’ve learned a lot, but on the financial aspect – I practically don’t have income for year 2010 while on the contrary – I accumulated large credit card debts.
This year (2011), I started to earn income thru freelancing (via oDesk.com). I was able to start paying my debts. At this point (Nov 2011), I still have negative net worth. I’m living a simple life (no car, no real estate property and no savings).
I strongly believe that no matter how corrupt the Philippines – we should pay correct taxes – as Jesus said “give unto Ceasar what is due to Ceasar and give unto God what is due to God”.
By 2012 – I’m hopeful that I will have a positive net worth in which I intend to pay my taxes diligently.
My question is – at this stage of my life while I still have a negative net worth – can I file tax exemption?
I now do have income,.. but because of my personal debts – some beggars on the streets are still technically much richer than me financially. Does our law have any provisions regarding this?
I look forward to your response.
Thank you very much,
Mic
Hi Mic,
I do also have a negative net worth. 🙂 Anyway we are taxed not according to net worth but according to taxable income or taxable sales/revenues/receipts (in case of business taxes). Thus, if you don’t have a net taxable income – then you don’t pay income tax. If you are a registered self-employed professional, rather than a pure employee, you are entitles to claim allowable expenses related to your profession/business. Hence, it might happen that if you have more allowable expenses, you might not arrive to taxable income – or perhaps with a little taxable income only. But I tell you, tax is really a burden. And in this country, even the small taxpayers like ourselves will indeed find it difficult to cover tax expenses.
Thanks for your response Vic.
With this, before Apr 15, 2012, I intend to pay my taxes due for taxable year 2011.
My question is – since I don’t have a net taxable income for year 2010 – is there any BIR form (e.g. tax exemption form) that still needs to be submitted when a person does not have a net taxable income for a certain year?
One more question – is this the latest tax table: http://www.bir.gov.ph/info-efps/Form%20Guidelines%20And%20Instructions/Form%201700%20Guidelines%20and%20Instructions.html ?
Thanks again,
Mic
Hello,
If the company gives me a car as a bonus for joining them, would this be taxable?
Yes, taxable for fringe benefits of 32% employer will be paying for it, unless agreed otherwise..
Yes, taxable Adrian.
how do you compute penalties for failing to file 1701Q? i have been filing my 2551M and annual itr religiosly but i failed to file my 1701Q for 5yrs.i thought kc wala na yun quarterly, i was recently told by my friends na 2551Q daw ang ni remove, not the 1701 Q i am planning to go at the bir and consult them. i know i have penalties, and i know ignorance is not an excuse. i just want to be emotionall and financially prepared. thanks a lot.
Hi Mary. Penalty will be 25% surcharge, 20% interest and compromise penalty of P200 to P50,000 depending on the amount of basic tax due. I suggest you attend our basic bir compliance seminar workshop so you will learn more about mandatory bir requirements and avoid similar instance in the future. Thanks.
Hi! I’m a new entrepreneur. Does the ‘Representation Expenses’ fall under ‘Entertainment, Amusement, & Recreation Expenses’? Will the ceiling also apply for the ‘Representation Expense’ even though they are mostly meals? I’m asking this because in my line of business, the ‘Representation Expenses’ is present most of the time. Thanks in advance.
The ceiling for reperesentation expense depends on the nature of your business. Selling of goods .05% of net sales, Selling/rendering of services 1% of net sales.
Hi. Is there any other way for me to claim as deductible expenses our representation expense that exceeds on the limitations? Considering legal matters. Thank you in advance!
can senior parents who you support be counted as dependents?
No. Only your own children can be claimed as qualified dependent may it be ligitimate or illigitimate or adopted provided supported by adoption paper.
Hi Vic,
I just want to ask, are they government insurance like SSS,Philhealth and Pag-ibig paid by the employer monthly can be subject to deductible expenses of the business?
I’m just not sure if it is or not. thanks!
Yes, those are deductible.
Is there a maximum allowable deduction for each? if yes, how much? thanks.
could there be an income tax expense in the books of a propritorship? or if there is income tax it should be charged against the capital of the owner? what should be the entry?
Hi. Income tax expense is shown as expense in your income statement, after income before income tax.
The net income that is charged to your capital should already be net income after tax.
Entry is:
Income tax expense XXX —- (this will reduce your income, as well as your capital (forwarded))
Income tax payable XXX —- (the amount still payable as of the balance sheet date/reporting period)
If you have credits for the previous quarters income tax payments, entry can be:
Income tax expense XXX
Income tax payable XXX
Other assets/tax credits XXX
Hello Vic
i am a new in line of business sole prop. and my tax code is monthly i dont know anything about taxation.. ang tanong ko lang po eh kung monthly ako nagbabayad ng percentage tax.. sa annual ba ganun din? monthly percentage tax X 12 months then ayun na babayadan ko ng annual?
No. You pay percentage tax monthly and what is payable at yearend is not % tax but income tax.. Actually, you need to file quarterly income tax as well and it is computed differently from % tax.
My business is room rental, and currently the land where my business is located is on dispute and there’s an ongoing case. Can I consider lawyer’s payment and other expenses related to the case as allowable deductions? Thank you.
The question is, is the land asset of the business or you only being rented by your business? If it’s an asset of the business, then you can claim those expenses as deductions as they are ordinary and necessary..
Thanks for this great and informative post. I left my job last January and started working homebased as a remote online marketing strategist. What expenses exactly can I deduct from my taxable income? I pay my rent (where I live but where I also work), my utilities (electricity, water, internet) and I also shoulder the paypal charges from which my monthly salary is transmitted, are these allowable deductions? I also support my senior parents (does that mean I can deduct 50,000 – me as head of family and 25,000 each for my parents since they are my qualified dependents? Thanks in advance.
Hi Sir Vic,
I am helping out a friend with her business (sole proprietorship). it has been operating for a year now. but has not submitted any report to bir yet. my problem is, where do i start, what report is to be submitted when, and how..and everything about taxes or forms to be filed in bir. i hope you can help me with these. thank you.
hi!
Sir, I’d like to clarify this matter about the preparation of Financial Statement (Income Statement) of an individual employed and with business. In computation of the income tax, the compensation income and income from business were included. But upon viewing the Income Statement, the only income included in there is only from business. And the Provision for income tas is the tax due pertaining to business only. When I consulted to a friend, he said that there’s no need to include the compensation income in the IS since there was 2316 already attached. is he correct? Or what is the correct presentation of my concern in the Financial Statement?
Thank you
In the Income statement of the business, the compensation income of the person may not already be included. But in the income tax return, compensation income is included since you have to show your total income (business + compensation). It is then deducted by the compensation income withheld and claimed as credit based on BIR form 2316.
Hi Vic,
I am starting a business and have secured BIR and business permit. I am entitled to a percentage tax. Is my rent expense on my shop deductible? to my gross income?
sir, ang “De Minimis” ba ay pwede b deductible s Business as sole proprietorship, paano? Salamat!
How about taxes paid this year for BIR assessment of previous year can it be deducted my receipts naman
Hi Sir,
Ask ko lang po, what is the treatment for 3% percentage tax? Is it deductible expense or Creditable Tax?
Thank you
Hi Mr. Vic,
May I know if the interest paid to stockholder are deductible as expense? The company is a closed family Corporation.
ask ko lng po, paano po kun malaki p ang expenses kesa sa income from business? paano po compute ang income tax? and s itemized po deduction po, need p po ba yun mga receipts n iattached?
Hi All,
Quick question. How will I start filling up 1701 form? I have a small business as sole proprietorship and my business has just started last Feb 2016 and this is my 1st time to process those such BIR forms. Please help me. Thank you
Hello Patricia – I can help you process your Tax Returns for this year. You may contact me at 0916-3410218
ask ko lang po. dun po ba sa allowable deductions sa schedule 6, entire year po ba na mga expenses ang cover? hal. expenses sa communication light and water for the whole year ilalagay dun?
Hi Sir, are receipts from Agoad valid to be recognized as expense.
Thanks!
sorry, AGODA – hotel booking
My friend is asking if life insurance premium for sole prop is allowable deduction or expense?
Should all expenses deductible be supported by official receipts or sales invoice? Is it acceptable if the supporting receipt is only generic delivery receipts, no OR or SI issued for the purchase of goods? Can we still use this as deductible expense?
Hi Vic,
I started (Feb 2017) renting my apartment to my tenants this year. I have been paying the 2551M since then and the 2-quarterly (1701Q). Following are my queries:
1. Can I include in the deduction, the 3-quarters (1701Q) of 2017 payments from the annual 1701 income tax return (before April 15, 2018)?
2. Can I include the registration, permits – fees I paid to register my APT Leasing?
3. Anything else I can include?
Awaits your reply. Thank you
1. The taxes paid in the first three quarters are filled up in the annual 1701 form as “taxes paid in the previous quarters” so they are deducted in your total taxes paid for the whole year.
2. Yes, as long as they are documented. You will actually report them in your ITR form or FS.
3. Please consult with a BIR accredited accountant to look closely with your business. You can also seek out assistance from the BIR examiner who’s in charge for the day.
Is foreign tax payments cannot be claimed as an allowable deduction from gross income?
You have to identify first if the tax payment is eligible to be claimed as tax credits to your income tax payable. I recommend getting a tax ruling from a BIR to make sure you’re doing the right thing.
thank you
Can a private education claim 100% of its expenses related to building a classroom even if it is big like 200 Million pesos as an allowable deduction?
Hi. When it comes to that amount, you better ask a BIR examiner to ask for the correct allocation of your expenses. The cost of purchase or constructing a building is not treated as an outright expense but is amortized over a period of time. It’s also wise to hire a BIR Accredit Accountant to do your agency’s accounting and bookkeeping.
Hi Sir Vic,
I have a question, i am a sole proprietor, non vat, buy and sell po ang business naming mag asawa and online seller/distributor of plastic bottles, first time po ako mag fifile ng annual income tax return 1701, last year 2017 may question is?
1. Ano po ang pwedeng gamitin na account title for replacement sa purchased goods, nakapag file napo kasi ako ng 1701Q last 2017 at naisama ko po yung mga products na binebenta ko as expenses. Ano po kayang magandang treatment account title/name na pwede ko ipalit sa purchased goods pag buy and sell lang naman po at walang inventory na nangyayari?
2. Ano po kayang pwedeng gamitin na name of expenses pag nag sasave ng money para sa mga expenses like vehicle allowance, business renewal allowance, medical allowance, and salary or allowance po naming mag asawa. Pwede ko po bang isama ito sa report ko ng expenses kahit walang receipt?
3. Ano po ba ang miscellanous, salaries and allowances na tinatawag ?
Umaasa po ako sa positibo ninyong sagot. Marami pong salamat
Hello po, yung gastos ba sa mga business permit like mayor permit considered purchase of capital goods? salamat
pwede bang iexpense lahat ng representations incurred? ung company is wala pang sales…Thanks for your reply
Hi Sir,
Ask ko lang po are expenses paid to Tax Exempt Associations deductible to income of taxable corporation before tax computation?
thank you in advance for your answer 🙂