Tax deduction reminder
By: Atty. Euney Marie J. Mata-Perez on September 25, 2025
THE Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) 81-2025 reiterating and providing additional guidelines for deductions from gross income for income tax purposes.
As a basic rule in taxation, a taxpayer must show that claimed deductions from gross income clearly come within the language of the law since tax deductions, like exemptions, are matters of “legislative grace.” As such, they are strictly construed against the taxpayer, who has the burden of justifying the allowance of any deduction claimed. RMC 81-2025 reiterated this doctrine, adding that tax deductions “do not turn on mere equitable considerations.”
RMC 81-2025 reiterated the basic principle underlying business deductions as set out in Section 34(A)(1) of the National Internal Revenue Code that “there shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession.”
For a business expense to be allowed as valid deductions from gross income, the following conditions must be met:
– The expense must be ordinary and necessary.
– The expense must be paid or incurred within the taxable year.
– The expense must have been paid or incurred in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession.
– The expense must be supported by invoices, records or other pertinent papers.
An “ordinary” expense is one that is normal, usual and customary in the type of business conducted by the taxpayer. It does not need to be habitual or recurring, but should be common in the context of the business. The expense must be typical and usual in relation to the business activities.
RMC 81-2025 provides that in determining whether a particular expense is ordinary, the size and relative proportion of expenses must be considered. It should also meet the further test of reasonableness in amount.
Citing various court cases, RMC 81-2025 provides that an expense that is inordinately large cannot be considered ordinary even if it is necessary. It states that if an expense nearly equals half of the total claimed expenses, it may be considered as inordinately large and thus cannot be considered “ordinary” even if it might be “necessary” for the business’ marketing strategy.
An expense is “necessary” if it is appropriate and helpful for the development of the taxpayer’s business. This implies that the expense should be directly connected and proximately resulting from carrying on the business and must contribute to the generation of income or profit or minimizing a loss.
In this regard, RMC 81-2025 provides that costs incurred for the remittance of funds to an overseas head office are not deductible.
For an expense to be directly attributable to trade, business or profession, it must be paid or incurred in connection with the development, management, operation, and/or conduct of the trade, business or profession. This means that there should be a direct link between the expense being deducted and the taxpayer’s regular business activities. Also, it must be ensured that they are essential for maintaining and generating business income.
RMC 81-2025 provides that expenses directly tied to passive income (which are generally subject to a final tax and thus, no longer included in the calculation of a taxpayer’s ordinary net taxable income) cannot be offset as deduction against its active income. Expenses related to passive include those for financial advice, interest from loan to finance investments or brokerage services, and other related expenses.
When a taxpayer incurs expenses related to both active and passive income, it must be determined which expenses qualify as valid deductions under the “ordinary and necessary” provisions. This requires careful consideration of the expenses’ direct connection to the taxpayer’s income-generating activities.
Active income typically arises from the direct involvement (active pursuit) in trade, business or professional activities, while “passive income” comes from investments like dividends, interest and royalties.
The deductible business expenses claimed must be for expenses that are paid or incurred within the taxable year when the corresponding revenue is earned, consistent with the matching principle on income and expenses under the Generally Accepted Accounting Principles.
The taxpayer must substantially prove by evidence or records the deductions claimed under the law, otherwise these will be disallowed. The mere allegation that an item of expense is ordinary and necessary does not justify its deduction. Evidence, such as official invoices and vouchers, must be presented.
While RMC 81-2025 seeks to remind taxpayers of the basic rules on income tax deduction, we hope that its provisions will not be applied literally and unreasonably.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Chair of the Tax Committee of the Management Association of the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on September 26,2025. Please see this link. https://www.manilatimes.net/2025/09/25/business/top-business/tax-deduction-reminder/2189877