Tax Alert No. 26 Revenue Memorandum Circular (RMC) No. 81-2025

Reiterating the Criteria and Guidelines on the Deductibility of Ordinary and Necessary Expenses Under Section 34(A)(1)(a) of the National Internal Revenue Code of 1997, as Amended.

Please be informed that Revenue Memorandum Circular (“RMC”) No. 81-2025 has been issued on 3 September 2025 to reiterate the criteria and guidelines on the deductibility of ordinary and necessary expenses under Section 34(A)(1)(a) of the National Internal Revenue Code of 1997, as amended. 

1. Persons entitled to deduct under Section 34 of the Tax Code: 

• Individuals who are citizens or resident aliens under Section 24(A) of the Tax Code; 
• Non-resident aliens engaged in trade or business in the Philippines under Section 25(A) of the Tax Code; 
• Members of general professional partnerships under Section 26 of the Tax Code; 
• Domestic corporations under Section 27(A) of the Tax Code; 
• Proprietary educational institutions and hospitals under Section 27(B) of the Tax Code; 
• Government-owned and controlled corporations (GOCCs) under Section 27(C) of the Tax Code; and 
• Resident foreign corporations under Section 28(A)(1) of the Tax Code. 

1. 2. Criteria for deductibility of the expense: 

• It must be ordinary and necessary; 
  • Ordinary expense is one that is normal, usual and customary in the type of business conducted by the taxpayer. It does not need to be habitual or recurring but should be common in the context of the business.  
  • Necessary expense is one that is appropriate and helpful for the development of the taxpayer's business. This implies that the expense should be directly connected and proximately resulting from carrying on the business and must contribute to the generation of income or profit or minimizing a loss. 

• It must be paid or incurred within the taxable year; 
  • The deductions shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. Therefore, the deductible business expenses claimed must be for expenses that are paid or incurred within the taxable year when the corresponding revenue is earned.  
  • Taxable year may either be calendar or fiscal depending on the basis upon which the net income is computed. 

• It must have been paid or incurred in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business, or exercise of a profession; and 
  • Directly attributable means the expenses must have a clear and direct connection to the development, management, operation, and/or conduct of trade, business, or profession, ensuring they are essential for maintaining and generating business income.  
  • Expenses incurred in relation to both active and passive income; only those that are related to active income are deductible. Expenses related to managing investments that generate passive income, such as fees for financial advice, interest from loans to finance investments, or brokerage services, and other related expenses may not qualify as ordinary and necessary expenses, as they do not relate directly to the taxpayer's active business operations. 
• It must be supported by invoices, records or other pertinent papers. 

1. 3. Expenses solely incurred in relation to the following income are not deductible for regular income tax purposes: 

• Tax-exempt income; 
• Income subject to final withholding tax; and 
• Income subject to preferential tax rates. 

For enterprises registered with Investment Promotion Agencies availing of the 5% special corporate income tax, only direct costs related to the production of goods/services are deductible.

You may access the full version of the RMC through the BIR website.

For any inquiry or request for assistance, please feel free to contact anyone from our Tax Services group. You may also reach us through this link