BIR Issues RMC No. 81-2025: Guidelines on Deductibility of Ordinary and Necessary Business Expenses

(c) Inquirer

The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) No. 81-2025, reiterating the criteria and guidelines on the deductibility of ordinary and necessary expenses under Section 34(A)(1)(a) of the National Internal Revenue Code of 1997 (Tax Code), as amended.

This circular provides clarity for taxpayers on what constitutes allowable deductions to ensure fairness, transparency, and accuracy in tax reporting.

Who Are Entitled to Claim Deductions?

The following taxpayers may claim deductions from gross income under Section 34 of the Tax Code:

• Individuals (citizens and resident aliens) engaged in business or practice of profession

• Non-resident aliens engaged in trade or business in the Philippines

• General professional partnerships and their members

• Domestic corporations

• Proprietary educational institutions and hospitals

• Government-owned and controlled corporations (GOCCs)

• Resident foreign corporations

Criteria for Deductibility

For an expense to qualify as deductible, it must meet all the following conditions:

1. Ordinary and Necessary

   • Ordinary Expense: Normal, usual, and customary in the business.

   • Necessary Expense: Appropriate, helpful, and directly connected to the business’ development and operations.

2. Paid or Incurred Within the Taxable Year

   • Expenses must be recorded in the same taxable year when the related income is earned.

3. Directly Attributable to Business or Profession

   • Must have a clear link to the taxpayer’s trade, business, or professional activity.

4. Properly Substantiated

   • Supported by invoices, receipts, and other official documents. Mere allegations are not sufficient.

   
   
   
   

Non-Deductible Expenses

The RMC clarifies that not all expenses can be deducted. The following are non-deductible:

• Expenses related to tax-exempt income

• Expenses related to income subject to final withholding tax (e.g., interest and dividends)

• Expenses improperly charged to preferential tax rate income (e.g., under the 5% SCIT incentive)

This prevents “double benefits” where a taxpayer claims deductions on income already exempt or subject to final tax.

Key Takeaways for Businesses and Professionals

• Always ensure expenses are ordinary, necessary, directly related, and well-documented.

• Segregate expenses properly when dealing with active vs. passive income, and with taxable vs. exempt income.

• Non-compliance may lead to disallowance of expenses and possible tax deficiencies.

Conclusion

The issuance of RMC No. 81-2025 strengthens the BIR’s framework for determining deductible expenses. By emphasizing the principles of ordinariness, necessity, attribution, and substantiation, this circular ensures that business expenses reflected in tax returns are accurate, fair, and compliant with Philippine tax laws.

Taxpayers are advised to carefully review their business expenses and maintain proper documentation to avoid disallowances and penalties.