BIR Issuances – RMC No. 23-2025

Revenue Memorandum Circular No. 81-2025

Date Posted (BIR Website): September 3, 2025

Effectivity: Immediately

Reiterating the criteria and guidelines for the deductibility of ordinary and necessary expenses under Section 34(A)(1)(a) of the National Internal Revenue Code (NIRC) of 1997, as amended.

I. Background

• Section 34(A)(1)(a) of the NIRC allows deductions for expenses that are ordinary and necessary in the conduct of trade, business, or profession.
• These must be directly attributable to business operations and substantiated with proper documentation.

II. Persons Entitled to Deduct Expenses

Deductions are allowed for:

1. Individuals (citizens/resident aliens)- Sec. 24(A), NIRC;
2. Non-resident aliens engaged in business – Sec. 25, NIRC;
3. Members of general professional partnerships – Sec. 26, NIRC;
4. Domestic corporations – Sec. 27 (A), NIRC;
5. Proprietary educational institutions and hospitals – Sec. 27 (B), NIRC;
6. Government-owned and controlled corporations (GOCCs) – Sec. 27 (C) , NIRC; and
7. Resident foreign corporations – Sec. 28(A)(1), NIRC.

III. Criteria for Deductibility

For expenses to be deductible, expenses must:

1. Be ordinary and necessary;
2. Be paid or incurred within the taxable year;
3. Be directly attributable to the business or profession; and
4. Be substantiated with proper documentation (i.e.  invoices, records or other pertinent papers).

A. Ordinary and Necessary Expenses

• Ordinary: Usual, customary, and typical in business (need not be habitual, but reasonable in amount).
• Necessary: Helpful and appropriate for the business.
• Limits:
  • Excessive or disproportionately large expenses are not ordinary (e.g., marketing expenses nearly half of total claimed costs).
  • Unreasonable compensation payments not related to actual services are not deductible.
  • Burden of proof rests with the taxpayer.

B. Paid or incurred within Taxable Year

• Must fall within the taxable year based on accounting method (cash or accrual).
• Matches the GAAP principle of associating expenses with revenue generated in the same period.

C. Direct Attributable to Business/Profession

• Must have clear connection to taxpayer’s business activities.
• Expenses related to passive income (interest, dividends, royalties) are generally not deductible, since such income is already subject to final tax.
• Differentiates active vs. passive income:
  • Active = requires continuous/direct participation in business.
  • Passive = earned without substantial participation (e.g., investments).
• Expenses must be segregated if linked to different income streams (regular, preferential, tax-exempt, or final tax).

D. Substantiation

• Expenses must be proven with official records.
• Mere allegations do not justify deductions.
• Rule: deductions = exemptions → strictly construed against taxpayers.

IV. Expenses Related to Tax-Exempt Income

• Not deductible since they do not contribute to taxable income.
• Prevents double benefit (tax exemption + deduction).

V. Expenses Related to Income Subject to Final Withholding Tax

• Expenses related to such income (e.g., bank charges, brokerage fees) are not deductible, since FWT is final.

VI. Expenses Related to Preferential Tax Rates

• Must be segregated from regular income expenses.
• For businesses under 5% SCIT (Special Corporate Income Tax), only direct costs are deductible.
• Indirect costs (e.g., advertising, office supplies) are disallowed.

VII. Special 5% SCIT Incentive Enterprises

1. • For IPA-registered enterprises under 5% SCIT, only direct costs (production-related) are allowed.
   • Indirect expenses (advertising, representation, office supplies, unrelated freight/handling) are disallowed.

VIII. Effectivity

• The circular is effective immediately.
• All inconsistent rulings and issuances are amended, modified, or revoked.

You may access the full version of this RMC through the link below.