What the BIR considers a deductible business expense (and what it does not)
If you earn from freelance work or run a business, knowing which expenses legally reduce your taxable income can make a real difference. Here is what the BIR rules actually say.
If you earn from a business, freelance work, or a professional practice, you already know the basic idea: income minus expenses equals taxable profit. But the BIR does not let you deduct every peso you spend. There are rules about which expenses qualify, and getting it wrong can invite problems if the BIR ever examines your returns.
This post walks through how the BIR thinks about business deductions so you can make better decisions about your records.
The "ordinary and necessary" standard
The official BIR rules use a specific test for deductible expenses: the expense must be ordinary and necessary for your trade or business.
"Ordinary" means the expense is common in your line of work. A graphic designer paying for design software passes this test. A doctor paying for medical equipment passes it too. "Necessary" means the expense helps you earn income. If you removed that cost from your business, would it hurt your ability to operate? If yes, it likely qualifies.
That two-part test is the foundation. Every rule below flows from it.
Expenses the BIR commonly allows
The official BIR rules recognize several broad categories of deductible expenses for taxpayers who use the itemized deduction method.
Compensation and benefits. Salaries, wages, and allowances you pay your employees are deductible, as long as they are reasonable for the work done and are actually paid. Employee benefits within the legally exempt limits also qualify.
Rent. If you rent an office, a store, or a workspace directly tied to your business, that rent is deductible. If you rent a home and use part of it as a home office, only the portion used for business purposes is allowed, and you need to be able to show that allocation clearly.
Utilities. Electricity, water, and internet bills for your business premises qualify. If you work from home, the same pro-rated logic applies: only the business share is deductible.
Supplies and materials. Things you use up in the course of doing business, such as packaging, tools, or ingredients, are deductible when actually consumed in the business.
Professional fees. Fees you pay to accountants, lawyers, consultants, and other professionals for services related to your business are deductible. Keep in mind that if those fees meet the threshold for expanded withholding tax, you are required to withhold and remit that tax to the BIR.
Depreciation. Large purchases like computers, equipment, or vehicles do not automatically become a full deduction in the year you buy them. The BIR allows you to spread the cost over the useful life of the asset through depreciation. An accountant can help you calculate this correctly.
Interest on business loans. If you borrowed money to fund your operations, the interest on that loan is deductible, subject to certain adjustments under the official rules.
What the BIR does not allow
Some expenses feel like business costs but do not pass the BIR's test.
Personal expenses mixed into the business. Family meals, personal travel, and household bills are not deductible just because you run a business. If a meal involved a genuine client discussion, only the business-related portion can potentially qualify, and documentation matters a great deal here.
Capital expenditures treated as running costs. Buying a piece of equipment is not immediately deductible as a single-year expense. It is a capital expenditure, which must be depreciated over time. Treating it as a one-year write-off overstates your deductions and can be flagged during an examination.
Expenses without proper receipts. The BIR requires documentary support for every deduction. An official receipt or valid invoice from a BIR-registered supplier is the standard proof. Cash paid without documentation is a deduction you cannot defend if questioned.
Fines, penalties, and illegal payments. Penalties you pay to the BIR itself, fines to government agencies, and any payment that amounts to a bribe or kickback do not qualify as business expenses.
Non-business losses. Losses from personal activities, hobbies, or transactions unrelated to your trade do not reduce your business income.
Why receipts are the real proof
You might have a perfectly legitimate business expense, but without a valid receipt or invoice, the deduction is at risk. During a BIR examination, the examiner will ask for supporting documents. Missing receipts mean disallowed deductions, which means a higher tax assessment.
The practical habit: keep every official receipt and invoice you receive for business purchases. Organize them by month. The BIR has been expanding acceptance of electronic documents, but check the current rules on format and retention with the BIR or an accountant to stay compliant.
This only matters if you use itemized deductions
These rules apply only if you file using itemized deductions. The BIR also allows an optional standard deduction (OSD), which lets you deduct a flat percentage of gross income without tracking individual expenses. If you have not yet decided between OSD and itemized, the right choice depends on how much you actually spend on legitimate business costs versus your total income. Sometimes itemizing wins; sometimes the flat OSD is simpler and just as good.
Have a specific expense you are unsure about?
The exact rules on what qualifies, what gets disallowed, and what the BIR expects as proof come from the official BIR regulations. Interpretations can vary by situation, and some categories have conditions attached.
Rather than guessing, bring your specific question to AskOnward. Describe the expense and the nature of your work, and you will get an answer grounded in the official BIR rules, not a general estimate.
This article is for general information and is not affiliated with the government. For official forms and the latest rules, see the Bureau of Internal Revenue at bir.gov.ph.