Tax Savings for Startups in the Philippines: OSD vs. Itemized Deduction
Published Date: March 28, 2025
Published By: Jac Cantos, Upcloud Accounting
Choosing the right tax deduction method is crucial for startups and SMEs in the Philippines. This decision significantly impacts your tax liability, cash flow, and overall financial health. Upcloud Accounting helps you navigate this choice. Let's examine the two main options: Optional Standard Deduction (OSD) and Itemized Deduction.
Understanding the Deduction Methods
Optional Standard Deduction (OSD)
The OSD offers a simplified approach. Businesses automatically deduct 40% of their gross income (corporations) or gross sales/revenue (individuals). This eliminates the need for meticulous expense tracking.
Pros: Simple compliance, minimal record-keeping.
Cons: Deduction is fixed at 40%, regardless of actual expenses. May not be optimal if expenses exceed 40%.
Best for: Startups with low operating expenses, freelancers, and businesses prioritizing ease of tax filing.
Example: A startup with PHP 1,000,000 gross revenue deducts PHP 400,000 (40%), leaving a taxable income of PHP 600,000.
Itemized Deduction
This method allows you to deduct all actual business expenses incurred to generate income. This includes rent, salaries, utilities, depreciation, and more. It requires detailed record-keeping.
Pros: Potential for higher deductions if expenses exceed 40% of revenue.
Cons: Complex compliance, requires thorough bookkeeping and documentation.
Best for: Startups with significant operating expenses, businesses with high overhead, and those expecting lower profit margins initially.
Example: A startup with PHP 1,000,000 gross revenue and PHP 500,000 in expenses has a taxable income of PHP 500,000 – lower than using OSD.
Which Method is Right for Your Startup?
The best choice depends on your specific circumstances.
Choose OSD if: Your operating expenses are low, you prioritize simple tax filing, and detailed record-keeping is a burden.
Choose Itemized Deduction if: Your expenses consistently exceed 40% of your revenue, you maintain accurate financial records, and you want to minimize your tax liability.
At Upcloud Accounting, we recommend a yearly review of your financial situation to determine the most beneficial deduction method. You can switch between OSD and Itemized Deduction annually. Contact us for personalized guidance tailored to your startup's unique needs.
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].
