What are tax deductions?

Published Tuesday 27 October 2026

Table of contents

• Tax deductions definition
• Itemized vs optional standard deduction (OSD) in the Philippines
• Common deductible business expenses per BIR
• Example of a tax deduction calculation
• Types of tax deductions for small business
• What you can’t claim as a tax deduction
• How to claim tax deductions
• Record keeping requirements
• Common tax deduction mistakes to avoid
• Simplify your tax deductions with Xero
• FAQs on tax deductions
• Related terms
• Learn more about tax deductions

Key takeaways

• A tax deduction is a business expense that reduces your taxable income, meaning you pay less tax overall. Common deductible expenses include office costs, business travel, professional services and marketing.
• You need to keep detailed records of all business expenses for five years, including receipts, invoices and documentation that proves the business purpose of each expense.
• If an expense is used for both personal and business purposes, you can only claim the business portion. For example, if you use your phone 80% for work, you can deduct 80% of the cost.
• Using accounting software to capture and categorize expenses as they happen makes it easier to track every eligible deduction and simplifies the process at tax time.

Tax deductions definition

A tax deduction is a business expense that reduces your taxable income, so you pay less tax. Tax deductions work by subtracting eligible expenses from your gross income to arrive at your taxable income.

Common deductible expenses for small businesses include:

• office expenses: rent, utilities, equipment and supplies
• business travel: transport, accommodation and meal costs
• professional services: insurance, legal fees and accounting costs
• marketing costs: advertising, website expenses and promotional materials

The Bureau of Internal Revenue (BIR) sets the rules for which business expenses you can deduct. You can claim itemized deductions for ordinary and necessary business expenses, or take the optional standard deduction (OSD). For individuals, the OSD is up to 40% of gross business or professional income (non-resident aliens can’t use it).

Itemized vs optional standard deduction (OSD) in the Philippines

You can lower your taxable income in one of two ways. Itemized deductions let you subtract your actual business expenses, while the OSD lets you subtract a flat percentage instead.

For individuals, the OSD is up to 40% of gross business or professional income (non-resident aliens can’t use it), according to PwC’s summary of individual deductions. For corporations, it’s 40% of gross income, as set out in PwC’s summary of corporate deductions.

The OSD replaces itemized deductions, so you pick one method. If you itemize, you need to keep extra supporting documents to back up each expense.

Since January 1, 2024, the Ease of Paying Taxes (EOPT) Act has removed the rule that tax must be withheld before you can deduct a cost, according to PwC. The cost still needs to be ordinary, necessary and substantiated.

The infographic below compares the OSD of up to 40% of gross business or professional income with the categories you can itemize.

If you choose to itemize, the next section lists the expenses the BIR allows.

Common deductible business expenses per BIR

The tax deductions available in the Philippines cover the ordinary costs of running your business, plus a few items with set limits. Each one reduces the amount of income tax you pay.

If you itemize under the graduated income tax rates, you can deduct the following, according to PwC’s summary of BIR deduction rules:

• ordinary and necessary expenses, such as raw materials, supplies and direct labor
• wages and compensation, including fringe benefits and travel
• business rentals
• interest, less a percentage of interest income subject to final tax
• entertainment, capped at 0.5% of net sales for goods or 1% of net revenue for services
• taxes
• losses
• bad debts
• depreciation
• charitable contributions, subject to limits
• research and development (R&D)

Getting the numbers right starts with understanding how deductions affect your tax. The next section walks through a real-world example.

Example of a tax deduction calculation

Tax deductions reduce your taxable income by subtracting legitimate business expenses from your total income. Here’s how it works in practice.

Jo owns a photographic studio and earned ₱770,000 last year. She has ₱150,000 in deductible business expenses, which reduces her taxable income to ₱620,000.

₱770,000 (gross income) − ₱150,000 (deductions) = ₱620,000 (taxable income)

Jo pays tax only on ₱620,000, not her full ₱770,000 income, so she saves money on tax.

Business purpose requirement

For an expense to qualify as a tax deduction, it must have a legitimate business purpose. A camera is deductible for a photographer, but not for a baker.

Personal vs business expenses

Not every expense you pay is fully deductible. You need to separate personal and business costs.

• Personal expenses: can’t be deducted (groceries, personal clothing)
• Mixed-use expenses: claim only the business portion (80% business use = 80% deduction)
• Purely business expenses: fully deductible when used exclusively for work

Record keeping essentials

Keep receipts for all expenses you plan to deduct. Proper documentation backs up each claim and makes sure you can claim legitimate deductions.

Now that you understand how deductions are calculated, here are the specific types of expenses you can claim.

Types of tax deductions for small business

Small businesses in the Philippines can claim a range of deductions. Check the latest guidance from the BIR or speak with an advisor to make sure you claim the right expenses.

Work-related expenses

These are costs you incur to earn your income, such as wages and travel expenses incurred in pursuing your trade or profession.

Business operating costs

These are the day-to-day running costs of your business. They include items like rent for your office, staff salaries and office supplies.

Home office deductions

If you run your business from home, you may be able to claim the business portion of your household running costs.

Vehicle and travel expenses

Business travel expenses incurred in pursuing your trade or profession are deductible.

Depreciation

When you buy assets for your business, such as equipment, tools or vehicles, you can claim their cost over time through depreciation. Depreciation is generally calculated using the straight-line method, though other acceptable methods are allowed.

Tax depreciation generally follows book depreciation, according to PwC’s overview of BIR depreciation rules.

Knowing what you can claim is only half the picture. It’s equally useful to understand what you can’t deduct.

What you can’t claim as a tax deduction

Some expenses are never deductible, no matter how closely they seem connected to your business. Being clear on what falls outside the rules helps you avoid penalties and wasted time at tax time.

Expenses you can’t claim include:

• personal expenses: groceries, personal clothing, gym memberships and other costs unrelated to earning your income
• fines and penalties: BIR surcharges and compromise penalties aren’t deductible, even if they relate to your business
• entertainment above the BIR cap: spending beyond 0.5% of net sales (goods) or 1% of net revenue (services) isn’t deductible
• capital expenses: the cost of long-term assets is recovered through depreciation rather than deducted all at once
• private portion of mixed expenses: if an expense is partly personal and partly business, only the business portion is deductible

If you’re unsure whether a specific expense qualifies, check the BIR website or speak with a registered tax agent.

Once you know which expenses qualify, the next step is understanding how to claim them correctly.

How to claim tax deductions

Claiming deductions doesn’t have to be complicated. It comes down to following a clear process and keeping good records throughout the year.

Follow these steps to claim your deductions:

1. Confirm you spent the money yourself and weren’t reimbursed.
2. Make sure the expense directly relates to earning your income.
3. Keep a record (like a receipt) to prove the expense.
4. Calculate the deductible amount, separating any personal use.
5. Enter each deduction in your tax return under the correct category.

Using accounting software to track deductions

Tracking expenses manually can lead to missed deductions and errors. Using accounting software helps you capture and categorize expenses as they happen, so you can claim all your eligible deductions at tax time.

Good records are the foundation of every successful deduction claim. Here’s what the BIR expects you to keep.

Record keeping requirements

The BIR requires you to keep records that prove your income and expenses. Good records make tax time smoother and help you answer any questions about your return.

What records to maintain

You should keep records for all your business transactions. This includes invoices, receipts, bank statements and contracts.

For expenses, your records should show:

• what you bought
• when and where you bought it
• how much you paid
• how it relates to your business

How long to keep records

You need to keep your business records for five years. The BIR requires this under Section 235 of the National Internal Revenue Code (NIRC), as amended by the EOPT Act.

The five years count from the day after the filing deadline, or from the date you filed if you filed late. Make sure your filing system is organized and accessible.

Digital vs physical records

You can keep records in paper or digital format. Digital records are easier to store, search and back up. Use software to snap photos of receipts and reduce paper clutter.

Even with the right records in place, there are common pitfalls that can trip you up. Here’s what to watch out for.

Common tax deduction mistakes to avoid

Knowing about common mistakes can help you claim with confidence at tax time.

Personal vs business expense confusion

You can only claim the business-use portion of an expense. If you use your car for both business and private trips, you need to separate the costs and only claim the business part.

Insufficient documentation

You can’t claim a deduction if you don’t have a record to prove it. Make sure you keep clear, organized records for every claim, and store them securely for at least five years.

Overclaiming risks

Claiming expenses you’re not entitled to can lead to tax assessments, so check with an accountant or bookkeeper if you’re unsure whether an expense is deductible.

Staying on top of your deductions throughout the year is easier with the right tools. Here’s how Xero can help.

Simplify your tax deductions with Xero

Tracking every receipt and categorising every expense throughout the year can feel like a big job. Xero accounting software automates the process by connecting to your bank feeds, matching transactions and organizing your expenses in real time.

With Xero, you can snap photos of receipts, categorize expenses as they happen and generate reports that make tax time straightforward. Your accountant or bookkeeper can access your data directly, so there’s no back-and-forth at the end of the financial year.

See how deductions affect your bill with our income tax calculator. Get one month free.

FAQs on tax deductions

Here are answers to some frequently asked questions about tax deductions.

What’s the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income before tax is calculated, while a tax credit reduces the tax you owe directly.

Can I claim personal expenses as business deductions?

You can only claim the business portion of an expense. If an expense is partly personal, you need to calculate and claim only the percentage used for business purposes.

How do I know if an expense is tax deductible?

An expense is generally deductible if it directly relates to earning your income and you have a record to prove it. The BIR website has guidance on allowable deductions, and a registered tax agent can give you advice specific to your situation.

Related terms

• Expense
• Operating expense
• Assets
• Net profit
• Accounts payable

Learn more about tax deductions

• Cash vs accrual accounting
• Managing cash flow
• How to freelance
• Double-entry bookkeeping