[Ask The Tax Whiz] What taxpayers need to know about deductible expenses

I often get questions from taxpayers about what they can and cannot claim as business expenses. The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 81-2025 to clarify the rules on deductible expenses under Section 34(A)(1)(a) of the National Internal Revenue Code of 1997. While these rules are not new, the circular underscores the BIR’s strict position: deductions must fully comply with the existing law, particularly during the preparation of annual income tax returns (ITRs).

Deductions are not automatic. They must be reasonable and substantially supported. This circular is a timely reminder for all taxpayers to prepare carefully and avoid unnecessary risks.

Who is covered by RMC 81-2025?

RMC 81-2025 applies to taxpayers who compute their income tax based on net taxable income. This makes the proper application of deductions crucial in determining the correct tax due. Covered taxpayers under the Tax Code include:

• Individuals running a business or practicing a profession
• Foreign nationals doing business in the Philippines
• Members of professional partnerships
• Domestic corporations
• Educational institutions and hospitals
• Government-owned corporations
• Resident foreign corporations

What expenses can be deducted?

To qualify for deductibility, an expense must meet all four statutory requisites under the Tax Code:

1. Ordinary and necessary – common and appropriate for your business or profession.
2. Paid or incurred during the taxable year – aligned with the period of the ITR being filed.
3. Connected to trade, business, or profession – directly linked to generating income.
4. Properly substantiated – supported with receipts, invoices, contracts, and/or other sufficient evidence.

Failing to meet any one of these requirements is enough for the BIR to disallow the deduction.

Understanding ‘ordinary and necessary’

An expense is deductible only if it is both:

• Ordinary – usual and accepted in your line of business
• Necessary – appropriate and helpful in generating income

An expense that meets only one criterion does not qualify.

Preparing your ITR under RMC 81-2025

To minimize the risk of disallowed deductions, deficiency taxes, or penalties, it is advisable for taxpayers to:

• Review all expenses to confirm they are ordinary and necessary
• Align each expense with the taxable year it was incurred or paid
• Classify expenses according to whether they relate to taxable, exempt, or income subject to final tax
• Gather, organize, and retain supporting documents such as official receipts, invoices, and contracts
• Demonstrate a clear business connection for each expense

Careful preparation not only ensures compliance but also makes your ITR filing more accurate and efficient. Claiming deductions is more than arithmetic; it’s about proper documentation and adherence to the proper laws, rules, and regulations. – Rappler.com

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