All businesses aim to generate profits, increase revenues, and build a positive and healthy cash flow. However, to make profits, business owners and managers need to make sure there is an investment made to produce the goods and services that need to be sold. These resources that businesses use to churn out products are called cash outflows, and they are often in the form of expenses and purchases, which are all tax deductible.
Suppose the term tax deduction is unfamiliar to you. In that case, it is essentially the decrease in the taxable income of a business. In return, this lessens the amount of tax due to the BIR, as long as the proper accounting of all valid expenditures is in place. Of course, accounting expenses is not the sole way to reduce your taxes due. There are many ways to claim tax deductions legally, such as noting donations and charity work, bonuses for staff, transportation expenses, etc.
It is important to note that not all expenses are considered tax deductible. To claim tax incentives, companies and individuals must ensure that the expense in question meets the requirements to be considered “tax deductible”. These requisites are listed below:
1. Normal and Needed For Daily Operations
For an expense to be considered tax deductible, it must be necessary for the business or practice to thrive. Personal expenses are non-deductible since they do not contribute to trade, business, or industry. The expense must also be part of the ordinary day-to-day functions needed to sustain the business and keep it running. Take a look at the usual deductible list allowed by the BIR.
2. Must Have Proof of Transaction with Official Receipts
If a business carries out trade or sale without proper proof of the transaction, tax authorities may deem the transaction non-deductible. All proper transactions need to be substantiated with a receipt or invoice to prove that they did occur. Moreover, these receipts and invoices must also be registered to the BIR. All expenses with no solid evidence will be considered to have not occurred. Those who file for deductions, whether itemized or ordinary standard, must have supporting evidence in place. Otherwise, in case of a BIR audit or investigation, you could get in trouble.
3. Should Be a Reasonable Amount Compared to Size of Operations
The BIR and tax authorities do not put a limit on the number of expenses. However, they do have the right to question any transaction that seems suspicious. All expenses must be reasonable relative to the business or practice’s revenues. Any amount that seems overstated or understated will not only hinder your claims to tax relief, but it might also cause the BIR and other institutions to audit your business. This can lead to penalties, revocation of licenses, or the worst-case scenario, tax evasion charges in court.
4. Can Be Charitable as Part of CSR
Though donations to non-profit organizations are not part of normal business expenses, they can be claimed as deductions. Remember, the government and the whole world promote the concept of CSR or corporate social responsibility. Therefore, giving donations falls under the practices undertaken by private companies with the primary goal of positively influencing society.
Hence, charity donations are fully tax-deductible, so long as they are given to government accredited institutions. Donations made to non-government organizations, on the other hand, are only tax-deductible should the donation not exceed 10 percent of taxable income before charity contributions for individual income taxpayers and 5 percent for corporate income taxpayers.
5. Expenses Subject to Withholding Tax for Suppliers
Certain business expenses require a withholding tax upon payments to suppliers. For example, expenses subject to withholding tax are salaries, professional fees, rent, and payment of agents. All of these are deductible.
The requisites mentioned above for tax deductibles will aid you in preparing for tax season. Tax deductions are a legal means of tax avoidance that can lower your overall tax dues. Do not conflate this with tax evasion, which is deliberate non-payment of taxes or under declaration.
Your tax deductibles are a privilege that should not be abused. Follow the legal ways to claim them to avoid getting into trouble with the BIR. This also ensures your business reputation is clean. If you need help collating and keeping track of official receipts for your tax deductibles, give our team a call. We offer a free 30-minute consultation to guide you in preparing your taxes.