Ordinary business expenses are deductible to the extent of actual payments in the Philippines. These deductibles must be necessary expenditures for the business, trade, or professional practice. According to expert tax services in Manila, there is no limit on the amount you can deduct under the itemized deductions. It just needs to be reasonable! However, there are also some expenses that have limitations. These are limitations on deductible interest expense, deductible representation and entertainment, and deduction for charitable contributions.
1. Deductible Interest Expense Limitation
Interest expense is your payment for the borrowed funds that you used in your business. Are you one of the businesses that would use this as a scheme in tax planning? This is where you would borrow funds from financing institutions or banks so you can get deductible interest expenses here in the Philippines. You would use that as a scheme to lower your taxable income by 30% and your interest income will be subjected to a tax lower than the 30% income tax rate. If you do that, that is a scenario called “tax arbitrage.” It is the subject of the deductible interest expense limitation.
According to tax and audit services in the Philippines, the amended tax code says that interest expense deduction will be reduced by 33% of the interest income subjected to the final withholding tax. This is so that the tax effect of interest expense reduction can be neutralized. It is also so that the final income tax rate on interest income can be lowered.
2. Deductible Representation and Entertainment
The hospitality traits of Filipinos are carried on in their conduct of business. This rule allows those expenses as tax deductions for them to entertain their guests and employees so they can develop a better and friendlier atmosphere. It is still a business and the expenses and resources should not be exhausted on representation and entertainment.
Because of this, the law provides the following limitations:
- Goods – 0.5% of net sales, discounts, and allowances, and net of sales returns
- Services – 1% of gross receipts
Expert accounting services in the Philippines say that if you sell both goods and services, you will need to specify and segregate. If you don’t, the dominant figure for the principal operation will overrule the other. The reason why service sellers have a higher rate compared to goods sellers is because they are more likely to spend representation and entertainment dealings with their guests, customers, and clients.
3. Charitable Contributions Tax Deductions
The government has the obligation to render protection and support but since the needs are varied, the private institutions and individuals are a huge help to help cater the needs of the members of society most especially the less fortunate in health, natural calamity victims, education, and the such.
Under the law, charitable contribution deductions could be fully or partially deducted. If you donate to BIR-accredited donee institutions with proper documentation/certificates, and donations to NEDA-certified priority projects, then your contribution can be 100% deductible.
Note that your charitable donations should not exceed the following rates which are based on your taxable income before your charitable contribution:
- Individuals – 10%
- Corporate – 5%
The income tax rate for corporations should be lower since they are usually used for big operations. It is crucial to properly document your charitable contribution and ensure that it is in accordance with the law.
Gain a smoother tax journey in the Philippines by comprehending tax-deductible expenses and their constraints, ensuring financial optimization while remaining law-abiding. If you seek expert guidance, call our accounting services in Pasig today.