BIR Advisory Alert 🚨
Published Date: September 04, 2025
Published By: Jac Cantos, Upcloud Accounting
BIR ADVISORY: A Refresher on Deductible Business Expenses!
The Bureau of Internal Revenue (BIR) has released Revenue Memorandum Circular (RMC) No. 81-2025 to reiterate the rules on which business expenses taxpayers can deduct from their gross income. To ensure your claimed deductions are valid, make sure your business expenses meet ALL four of these essential criteria:
Ordinary and Necessary
Paid or Incurred Within the Taxable Year
Directly Attributable to the Trade, Business, or Profession
Supported by Invoices or Records (Substantiated)
Key Takeaways for Taxpayers:
What does "Ordinary and Necessary" mean?
Ordinary: The expense must be normal, usual, and customary for your type of business. An expense that is "inordinately large" may not be considered ordinary, even if it feels necessary.
Necessary: The expense must be appropriate and helpful for the development and operation of your business.
Substantiation is NON-NEGOTIABLE
You must prove your deductions with evidence like official invoices and other records.
Simply claiming an expense is ordinary and necessary is not enough to justify a deduction. The burden of proof is on the taxpayer.
Segregate Expenses Based on Income Type
A crucial reminder from the circular is that you cannot deduct expenses related to certain types of income from your regular taxable income.
Tax-Exempt Income: Expenses incurred solely to generate tax-exempt income are NOT deductible. This prevents a "double benefit" where the income is untaxed and the expense still reduces other taxable income.
Income Subject to Final Tax: Expenses solely related to generating passive income that is already subject to final withholding tax (e.g., interest on savings) are generally not deductible against other income.
Income Subject to Preferential Rates: Expenses directly tied to income taxed at a preferential rate (like the 5% Special Corporate Income Tax) must be segregated. They cannot be used to reduce income that is subject to the regular tax rate.
This circular takes effect immediately and serves as a guide for all taxpayers and revenue officers. Review your accounting practices to ensure compliance!
Upcloud Accounting: Virtual Outsourced Accounting and Bookkeeping Services in the Philippines
Upcloud Accounting offers accounting, bookkeeping, tax compliance, and business licensing services specializing with startups and SMEs in the Philippines.
Our goal is to increase efficiency, automation, and transparency across the accounting and finance functions of our clients with our cutting-edge technology. If you want to move your company’s finance function online, contact our Team of Expert Accountants and Bookkeepers directly via [email protected] or visit www.upcloudaccounting.com to learn more about how Upcloud Accounting accounting services can support your PH business!
Disclaimer: This article or blog is only for general knowledge and guidance and is not a substitute for an expert opinion. For technical advice, please consult your tax / legal advisor for your specific business concerns. For comments, suggestions, and feedback, feel free to email us at [email protected].
