Whether you’re leasing space, covering payroll, or investing in new equipment for your company, overhead costs can pile up fast. These expenses keep your business running, but come tax season, they also play another role. Every peso you’ve spent can reduce your tax bill, but only if you know how to track and claim it properly.
Here’s where smart tax planning comes in. Itemized deductions under BIR rules can significantly cut your taxable income. With a smart tax strategy in place, you free up cash to reinvest, expand your team, or strengthen your operations.
This guide walks you through:
- What itemized deductions really are
- What counts as a valid business expense under BIR rules
- How to track and maximize these deductions without breaking a sweat
Indeed, running a business can be tough—don’t let taxes take more than they should.
What Are BIR Itemized Deductions, and Why Do They Matter?
Itemized deductions are business expenses that the BIR allows you to subtract from your total income before calculating your taxes. These are the typical expenses you incur to keep your business running, such as rent, salaries, electricity, and supplies.
When you report these expenses correctly, you can lower the amount of income you’re taxed on. That means you could end up paying less in taxes legally.
Itemized deductions can:
- Help cut down your taxes – The more eligible expenses you can deduct, the smaller your taxable income becomes. That means a lower tax bill for your business.
- Let you keep more money – Less tax means more funds stay with you. That extra money can be used for day-to-day operations, employee salaries, or business growth.
- Help you stay on top of your records – Tracking your expenses helps you stay organized, making it easier to manage your business, not just during tax season.
- Keep you ready for BIR checks – If the BIR asks for documents, having your receipts and records in order proves you’re doing things right.
What Are the Requirements for a Deductible Expense?
Whether you belong to classified as MSMEs, you likely face tight margins and rising costs. If so, itemized deductions could mean real savings, but only if your expenses meet the BIR’s rules.
If your actual costs exceed the 40% cap based on the optional standard deduction (OSD), itemizing may further reduce your taxable income.
For example, your business earns ₱1 million, with actual expenses of ₱ 500,000. You can save an additional ₱100,000 in taxable income by itemizing, which may potentially result in a tax reduction of over ₱30,000.
However, there’s a catch: not every business expense qualifies. Before claiming anything on your tax return, it must meet four basic BIR requirements.
1. It must be ordinary and necessary
This means the expense should be something your type of business typically spends on and something necessary for your operations.
Suppose you run a café. Buying coffee beans and cleaning supplies clearly qualifies as an ordinary and necessary business expense. By contrast, purchasing an air fryer for your home kitchen and charging it to the business account won’t be considered under this expense category.
2. It must be paid or incurred during the taxable year
You can only deduct expenses that you paid for—or are legally owed—within the year you’re filing for.
Let’s say you pay for December rent in November. Since the payment was made within the same taxable year, it’s deductible. But paying for next year’s software subscription two years in advance is a different matter.
3. It must be directly related to your business
Your expenses should have a clear connection to how your business earns income, such as fuel for a delivery vehicle. However, if you spend on fuel for a family road trip, that expense is personal and will not be deductible.
4. It must be properly documented
No matter how legitimate an expense may seem, it won’t be counted without proof. Taking a client to lunch might qualify as a business expense—but only if you have the official receipt and a note explaining its purpose. Without documentation, even valid expenses get disqualified.
When in doubt, ask yourself: Is this for the business? Was it paid this year? Do I have documentation? If you can confidently say yes to all three, then it’s likely safe to deduct.
What Business Expenses Qualify as Itemized Deductions
You already know itemized deductions can help you cut down your tax dues, but only if the BIR recognizes them as valid. Under NIRC Section 34, valid deductions must be ordinary, necessary, and tied to your business.
So what can you actually claim? Let’s break down the everyday costs that may reduce your tax bill.
1. Salaries, wages, and mandatory contributions
Paying wages and government-mandated benefits, such as SSS, PhilHealth, and Pag-IBIG, is a necessity for any business. If you manage a tailoring shop, for example, employee pay and required contributions are naturally considered business expenses.
2. Fringe benefits (managerial-level only)
Perks like a company car or health insurance help you retain managerial talent, so they count as expenses too. Just make sure to handle fringe benefit tax correctly.
3. Rent and lease expenses
Renting a space, such as a commissary for your food business, is a basic cost of doing business. It supports operations directly, making it an eligible expense.
4. Utilities and communication
Electricity, internet, and phone lines are must-haves for daily operations. A business internet plan for your laundry shop makes the cut, but your personal Netflix subscription doesn’t.
5. Office supplies and consumables
Essential supplies, including paper, ink, packaging, and other day-to-day materials, are crucial to any business. They qualify as ordinary, necessary expenses.
6. Repairs and maintenance
Fixing a leaking café roof or replacing flickering office lights? Repairs like these keep things running and prevent bigger problems later, which is why they qualify as deductibles.
7. Travel and transportation
Taking an out-of-town trip for a supplier meeting? That’s a legitimate expense, as long as it supports your operations and you have the receipts to document it.
8. Interest expense
If you took out a loan to fund your inventory or equipment, the interest you pay is part of your cost of doing business.
9. Taxes and licenses
Most government-mandated fees related to operating your business are considered deductible expenses under the tax code. Documents like annual mayor’s permits, BIR registration fees, and environmental compliance certificates all qualify.
10. Depreciation and amortization
Large business purchases don’t incur their full cost at once—you spread out the cost over time through depreciation or amortization, depending on the asset type.
11. Bad debts written off
Not every customer pays up. If you’ve already issued an official receipt, made collection efforts, and still came up short, the BIR allows you to write it off. For example, if a wholesale buyer left you hanging for ₱15,000 and you got the paperwork to show it, that loss can be deducted.
12. Losses from theft or calamities
Lost inventory or damaged your space due to theft or a typhoon? If it wasn’t insured and you have recorded the loss properly, you may be able to reflect that in your deductions.
13. Charitable contributions and donations
Supporting a cause isn’t just a good deed; it’s also a wise tax decision. Donations to accredited NGOs or public institutions are deductible, provided you obtain the official certificate of donation.
14. Representation and entertainment
Business relationships matter. And yes, that includes lunch with a potential partner or coffee meeting with a key client. Keep the receipt, jot down the purpose, and you’re covered.
15. Advertising and promotions
Advertising is a significant investment that requires substantial capital. When you spend on ads, the BIR recognizes it as a valid business cost.
16. Professional and outside services
You don’t have to run your business alone. Hiring experts to help you can be a smart strategy. Paid a freelancer to fix your website or a tax pro to file your returns? Don’t worry, it’s all deductible.
17. Insurance premiums
Protecting your company against risks is part of staying resilient. Premiums on fire, property, liability, or employee insurance are considered deductible business expenses.
If you’re paying ₱15,000 yearly for fire insurance in your dental clinic, that amount can be included in your tax deductions list. Just present the policy and the original receipt.
18. Research and development (R&D) costs
Testing new ideas and improving products helps you grow, and it’s something the BIR rewards. If you invested in better packaging, worked with a formulator, or tested new materials, those R&D expenses would be deductible.
19. Employee training and upskilling
An empowered team is good for business. You can deduct costs associated with workshops, training sessions, or certifications that enhance employee performance and productivity.
20. Retirement contributions
Setting up a formal retirement plan demonstrates a long-term commitment to your employees. If the plan is registered with the BIR, your contributions to it may also qualify as a tax-deductible business expense.
Tips to Maximize Your BIR Itemized Deductions
BIR itemized deductions only work to your advantage if you’re managing them with intention. Here are some ways to maximize their benefits, not just during tax season, but throughout the year.
1. Track your expenses monthly
Instead of rushing through receipts when tax time approaches, keep things organized on a month-by-month basis. Use simple spreadsheets or accounting apps to log expenses by category. It helps you stay on top of things and spot missed deductions early.
2. Always ask for BIR-compliant receipts
Whether you’re replenishing inventory, paying rent, or seeking assistance from a contractor, you must have all your official receipts ready, complete with detailed information. These serve as your proof that the expense is valid and adequately documented.
3. Bring in a bookkeeper or accountant
Hiring a pro might sound like an added cost, but it can save you more in the long run. A trained eye can catch deductibles you might miss, ensure your reports are BIR-ready, and help you avoid penalties.
4. Connect expenses to outcomes
Your deductions aren’t just numbers on a form—they’re proof of where your business is growing. Training your team members sets them up for better performance. Meanwhile, that ad budget could lead to your company’s next big sale. When you tie expenses to results, you’re tracking costs while building strategy.
5. Plan your budget with taxes in mind
Before you spend, pause and ask: “Will this count as a deductible expense?” If you answered yes, plan it in a way that strengthens both your operations and your tax position. Then, keep things consistent. When you build budget planning into your monthly routine, tax time becomes less of a scramble and a lot more rewarding.
Build Business Momentum
Running a business demands your complete focus—you must keep the lights on and chase viable opportunities. But overlooking your taxes means leaving behind money you could use to fuel your next step forward.
Itemized deductions, when used strategically, can reduce your tax dues. As a result, you have more financial freedom to further grow your business.
And when you need flexible support to keep things moving, Unicapital is here. Explore short-term business loans in the Philippines with us.
