REVENUE MEMORANDUM CIRCULAR (RMC) NO. 081-2025
The Circular reiterates the criteria and guidelines for determining when business expenses may be considered deductible for tax purposes. Under Section 34(A)(1)(a) of the Tax Code, as amended, ordinary and necessary expenses paid or incurred within the taxable year that are directly related to the development, management, operation, or conduct of a trade, business, or profession are allowed as deductions from gross income
PERSONS ENTITLED TO DEDUCTION
The following taxpayers are allowed to claim deductions from gross income under Section 34 of the Tax Code, as amended:
- Citizens or resident aliens;
- Non-resident aliens engaged in trade or business in the Philippines;
- Members of General Professional Partnerships (GPP);
- Domestic corporations;
- Proprietary educational institutions and hospitals;
- Government-owned or -controlled corporations (GOCCs); and
- Resident foreign corporations.
| CRITERIA FOR DEDUCTIBILITY | |
|---|---|
| The expense must be both ordinary and necessary; | Ordinary Expenses: Ordinary expenses are those that are normal and customary in the business or industry. Similarly, in determining whether an expense qualifies as “ordinary,” its size and relative proportion must be taken into account. Jurisprudence consistently holds that an expense that is disproportionately large cannot be deemed ordinary, even if it is necessary. Necessary Expenses: Expenses must be appropriate, helpful in carrying out business operations, directly related to generating income or minimizing losses, and essential to maintaining business activities . However, expenses not directly related to business income in the Philippines, such as remittance costs to an overseas head office, are non-deductible. |
| It must be paid or incurred within the taxable year; | Expenses shall be recognized as deductible only in the taxable year in which they are paid or incurred, in accordance with the accounting method employed by the taxpayer. This principle ensures the proper matching of income and expenses within the same taxable period, thereby presenting a fair and accurate determination of the taxpayer’s taxable income. |
| CRITERIA FOR DEDUCTIBILITY | |
| It must be directly attributable to the development, management, operation and or conduct of the trade, business, or profession; and | For an expense to be deductible, it must have a clear and direct connection to the development, management, operation, or conduct of the trade, business, or profession. The expense should be essential in maintaining business operations and in generating taxable income. This Circular distinguishes between Active Income and Passive Income for purposes of deductibility: Active Income – income derived from activities that require the taxpayer’s direct and continuous participation in business operations. Expenses related to the generation of active income are generally deductible. Passive Income – income earned from sources such as dividends, interest, royalties, or rentals, which require minimal or no participation from the taxpayer. Expenses related solely to passive income are not deductible from active business income, since passive income is subject to final tax at source and is excluded from the computation of gross or taxable income. |
| It must be adequately supported by invoices, records, or other relevant documents | Taxpayers must substantiate deductions with adequate evidence. Claims must be supported by official invoices, receipts, or vouchers. Mere assertions that expenses are “ordinary and necessary” are insufficient without documentation. |
TAX TREATMENT OF EXPENSES PERTAINING TO TAX-EXEMPT INCOME
Expenses incurred exclusively in relation to tax-exempt income are not deductible for income tax purposes. Allowing such deductions would result in a double tax benefit, as the corresponding income is already exempt from taxation.
TAX TREATMENT OF EXPENSES RELATED TO INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT)
Income subject to FWT such as interest, dividends, and royalties has its tax obligations settled at the source. Therefore, expenses incurred solely to earn such income cannot be deducted from other taxable income subject to regular income tax.
TAX EXPENSES RELATED TO INCOME SUBJECT TO PREFERENTIAL TAX RATES
Expenses directly attributable to income subject to a preferential tax rate, such as the 5% Special Corporate Income Tax (SCIT) for registered enterprises, must be clearly segregated from those related to regular taxable income. This segregation prevents improper deductions and ensures the fair and accurate application of tax benefits.
Under Section 294(B) of the Tax Code, as amended, gross income earned refers to gross sales or revenues, less sales discounts, returns, allowances, and direct production costs. However, indirect operating expenses including advertising, representation, entertainment, commissions, clinic and office supplies, and non-production freight and handling cost are not deductible for SCIT purposes, in accordance with the Implementing Rules and Regulations of R.A. No. 12066.