The Bureau of Internal Revenue has issued Revenue Memorandum Circular No. 81-2025 to remind taxpayers of the strict requirements for claiming deductible business expenses. This guidance stresses that deductions are not automatic and must be fully supported. It applies to various taxpayers preparing their annual income tax returns.
The Bureau of Internal Revenue (BIR) recently released Revenue Memorandum Circular (RMC) No. 81-2025, providing clarity on the rules for deductible expenses as outlined in Section 34(A)(1)(a) of the National Internal Revenue Code of 1997. Although the underlying regulations are longstanding, the circular serves as a strong reminder of the BIR's rigorous enforcement, especially amid preparations for annual income tax returns (ITRs). Taxpayers computing their income tax based on net taxable income—such as individuals engaged in business or professions, foreign nationals operating in the Philippines, members of professional partnerships, domestic and resident foreign corporations, educational institutions, hospitals, and government-owned entities—must adhere closely to these provisions to determine accurate tax liabilities. Deductions require meeting four essential criteria: they must be ordinary and necessary, meaning usual and accepted in the taxpayer's line of work while also being appropriate and helpful for income generation; incurred or paid within the relevant taxable year; directly connected to the trade, business, or profession; and properly substantiated with documents like receipts, invoices, and contracts. An expense failing even one of these tests will be disallowed by the BIR. To avoid risks of disallowed claims, additional taxes, or penalties, experts recommend reviewing all expenses for compliance, ensuring alignment with the taxable period, classifying them by income type (taxable, exempt, or subject to final tax), organizing supporting evidence, and clearly linking each to business activities. This meticulous approach not only promotes compliance but also streamlines the ITR filing process, turning deduction claims into a matter of thorough documentation rather than mere calculation.
