3 Tax Deductible Expenses with Limits in the Philippines

When it comes to tax deductions in the Philippines, the world of finance can seem like a labyrinth. There are many rules such as you can deduct whatever business expenses in the practice of your trade or profession for itemized deductions. But certain deductibles also come with some limitations. Thus, understanding the ins and outs of tax-deductible expenses can significantly benefit your business. Let’s delve into three such expenses, each with its unique set of limitations.

1. Deductible Interest Expenses: A Tax-Saving Tactic

Interest expenses represent the funds you’ve borrowed for your business. Did you know that you can employ this as a clever tax planning strategy, provided that you have updated accounting and bookkeeping records as proof? By borrowing from financial institutions or banks, you can reduce your taxable income by 30% while keeping your interest income subject to a lower tax rate. This tax maneuver is known as “tax arbitrage.”

 

Now, here’s the catch: The tax code has been amended to introduce a 33% reduction in interest expense deductions for the interest income subjected to final withholding tax. The aim is to neutralize the tax impact of interest expense reduction and lower the final income tax rate on interest income. In other words, while you can deduct interest expenses, there are limitations aimed at preventing excessive tax benefits.

2. Deductible Representation and Entertainment: Balancing Business and Pleasure

Filipinos are known for their hospitality, even in the world of business. You can, in fact, deduct expenses incurred for entertaining guests and employees, creating a warmer and more convivial atmosphere. At the same time, you can use this to unlock your tax savings. However, the key is balance – you shouldn’t exhaust your resources on these activities.

 

Here are the limitations set by the law:

  • Goods: 0.5% of net sales, discounts, allowances (net of sales returns)
  • Services: 1% of gross receipts

If your business offers both goods and services, you’ll need to differentiate between them. The dominant figure for your primary operation will dictate the rules. Service-oriented businesses typically have a higher rate, reflecting their tendency to engage in more representation and entertainment with clients. Should you need clarifications, don’t hesitate to talk to accounting experts. 

3. Charitable Contributions: Giving Back with Bonus Tax Benefits

In the Philippines, private individuals and institutions play a vital role in supporting those in need, from health and natural disaster victims to education. The government alone cannot meet all these diverse needs, so it encourages contributions from the private sector.

 

Here’s how it works: If you donate to BIR-accredited donee institutions with proper documentation or certificates, and to NEDA-certified priority projects, your contribution can be fully deductible, or at least partially.

 

However, there’s a limit: Your charitable contributions should not exceed certain percentages based on your taxable income before the donation:

  • Individuals: 10%
  • Corporations: 5%

The lower rate for corporations acknowledges that they typically handle larger operations. To ensure your charitable contributions comply with the law, it’s crucial to keep meticulous accounting/ bookkeeping records for documentation.

 

In summary, understanding tax-deductible expenses and their limitations can help you make the most of your financial situation while staying within the boundaries of the law. So, whether you’re managing a business or handling your personal finances, these insights can be your key to a smoother tax journey in the Philippines. Ready to navigate your financial path with confidence? Call our accounting and bookkeeping experts today for tailored guidance. Take advantage of our free 30 minute consultation to get started!

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