Business expenses in the Philippines 2026: what you can deduct

Last reviewed: November 2026 · Reviewed by Stéphane Gombauld, tax expert, technologist and digital nomad

You freelance or run a company from the Philippines and want to know which costs cut your 2026 tax bill. Here are the deduction rules, the three regimes you can choose between, and the paperwork the Bureau of Internal Revenue (BIR) expects.

Philippines business expenses in 2026: the key figures

What changed for 2026

The core deduction rules in Section 34 are unchanged from 2025. Three recent reforms now apply for a full year:

• Section 34(K) is gone. The Ease of Paying Taxes Act (RA 11976) repealed it. It also fixed a five-year retention period and cut civil penalties to 10% for micro and small taxpayers.
• Power costs count double for incentivised projects. CREATE MORE (RA 12066) grants a 100% additional deduction on power expense used for a registered project.
• Digital services carry VAT. Under RA 12023, VAT-registered buyers withhold and remit 12% VAT on digital services bought from non-resident providers.

Is this guide for you?

Read on if you…

• are registered with the BIR as a self-employed professional, sole proprietor or corporation;
• want to choose between itemised deductions, the 40% OSD and the 8% option for 2026;
• run a foreign company's Philippine branch or plan to set up a local company.

Probably not your case if you…

• are a pure employee: compensation earners get exempt benefits, not business deductions (see personal tax deductions and benefits in the Philippines);
• are a foreigner with no Philippine-source income and no local registration.

What business expenses are deductible in the Philippines?

Section 34(A)(1) of the Tax Code allows "all the ordinary and necessary expenses" paid or incurred during the year in running a trade, business or profession. In practice, four tests decide each item.

1. Ordinary and necessary. Normal for your kind of business and useful to it. A co-working desk passes; a jet ski does not.
2. Paid or incurred in the tax year. Cash-basis taxpayers deduct when they pay; accrual-basis taxpayers when the liability becomes fixed.
3. Substantiated. Section 34(A)(1)(b) denies the deduction unless you prove both the amount and the business link, with "official receipts or other adequate records". In an audit, the BIR expects an invoice in your name; a card statement alone rarely does it.
4. Reasonable. Amounts must match what an unrelated party would pay, especially with family or your own company.

Common deductible costs

• Salaries and benefits. Wages, 13th-month pay and the employer share of SSS, PhilHealth and Pag-IBIG contributions.
• Rent, utilities and home office. Office rent, electricity, internet and phone. For a home office, deduct the business share only, split by floor area or hours, and apply one method every year.
• Travel. Transport, lodging and meals on business trips, at reasonable amounts and backed by invoices.
• Entertainment and representation. Client meals and events, capped at 0.5% of net sales for sellers of goods, or 1% of net revenue for service providers (PwC summary of the BIR caps, secondary).
• Depreciation. A "reasonable allowance" for wear and tear on laptops, equipment and vehicles under Section 34(F). Straight-line, declining-balance (at most twice the normal rate) and sum-of-the-years-digits are allowed.
• Interest. Business loan interest, reduced by 20% of any interest income already taxed at source.
• Losses. A net operating loss carries forward for the next three consecutive years, provided ownership has not substantially changed (75% test). No carry-back is allowed.
• Charitable gifts. Capped at 10% of taxable business income for individuals and 5% for corporations (Section 34(H)); some institutions qualify for full deduction.

What is never deductible

Personal, living and family expenses stay outside, even when paid from the business account. Capital purchases are depreciated, not expensed at once. Surcharges and compromise penalties on late taxes are not deductible, though interest on late taxes is. Income tax itself is never deductible.

What about withholding on your payments?

Here's the catch. Section 34(K) used to make withholding a condition of deductibility, and the EOPT Act repealed it. Whether the BIR can still deny the expense under its withholding regulations is not fully settled. Either way, as a withholding agent you stay liable for tax you failed to withhold. Keep withholding on rent, professional fees and contractors.

Should you itemise, take the 40% OSD, or choose the 8% option?

Individuals have three regimes. Corporations have two: itemised or OSD.

Rules of thumb for 2026:

• Real costs below 40% of receipts? The OSD beats itemising and needs no expense invoices for the deduction itself.
• Receipts under PHP 3,000,000? The 8% option usually wins, because it also removes the 3% percentage tax. Run the numbers if your costs are very high.
• VAT-registered, or costs well above half of receipts? Itemise. Agencies, traders and employers usually land here.

Timing matters. The OSD is elected in your return and is then irrevocable for that year (Section 34(L)). Signal the 8% option at the start of the year, and confirm the mechanics with your Revenue District Office before your first quarterly payment.

How does your business structure change what you can deduct?

Corporations also face a 2% minimum corporate income tax on gross income from the fourth taxable year. Heavy deductions cannot push the bill below that floor.

The capital floors come from the Foreign Investments Act as amended by RA 11647. Compare structures in legal forms of business in the Philippines, and use Heavnn's business setup service to test your plan before you register.

Permanent establishment warning. If you run a foreign company from a Philippine desk, the Philippines may treat it as doing business locally. A domestic corporation, in turn, stays taxed on worldwide profits wherever you travel.

What paperwork does the BIR expect?

1. Register each tax type with the BIR and keep your registration updated, as Section 236 requires.
2. Issue invoices for every sale of PHP 500 or more, a threshold indexed to inflation every three years. Smaller sales can be grouped into one end-of-day invoice. VAT-registered sellers invoice every sale, whatever the amount (Section 237).
3. Keep books of accounts with all supporting invoices for five years from the filing deadline, or from actual filing if late.
4. Withhold and remit tax on payments to suppliers and give payees their withholding certificates.
5. Foreign suppliers. Keep their invoices showing supplier, date, amount and service. For digital services from non-resident providers, VAT-registered buyers remit the 12% VAT within 10 days after the month of withholding.
6. Claim nothing you cannot prove. Unsupported items are disallowed in full, with surcharges and interest. See tax fraud regulations of the Philippines.

Common mistakes (and what they cost)

• Keeping only card statements. A bank record alone rarely proves both amount and business purpose under Section 34(A)(1)(b). The deduction fails on audit, with surcharges and interest on the extra tax.
• Expensing a laptop in full in year one. Capital assets must be depreciated. The excess is added back to income in an assessment.
• Ignoring the entertainment cap. A consultant with PHP 2,000,000 net revenue can deduct only PHP 20,000 of client entertainment. The rest is disallowed.
• Dropping withholding after the 34(K) repeal. You remain liable as withholding agent for the tax you failed to withhold, plus penalties.
• Crossing PHP 3,000,000 on the 8% option. The option no longer covers you, and VAT registration plus graduated rates follow.

Frequently asked questions

What is the optional standard deduction in the Philippines?

The OSD replaces actual expenses with a flat deduction under Section 34(L). Individuals deduct up to 40% of gross sales or receipts; corporations, 40% of gross income. You need no invoices for the deduction itself, but you still keep sales records. It suits businesses with low real costs.

Can a freelancer deduct a home office in the Philippines?

Yes, if you itemise. Deduct the business share of rent, electricity and internet, split by floor area or working hours, and apply one method consistently. Keep invoices in your name. Personal living costs remain non-deductible. Under the 8% option or the OSD, no separate home office deduction exists.

Is the 8% option better than itemising?

For most freelancers under PHP 3,000,000 of receipts, yes. The 8% applies only to receipts above PHP 250,000 and replaces the 3% percentage tax. Itemising wins only when real costs are very high relative to receipts. Run all three regimes before your first payment of the year.

How long must I keep accounting records in the Philippines?

Five years. Section 235 of the Tax Code, as amended by the EOPT Act, counts from the filing deadline. If you filed late, it counts from the actual filing date. Keep books and supporting invoices for that period. If an audit is open, keep everything until it closes.

Do I need an invoice for every expense?

You need proof for every deduction. Sellers must issue invoices for sales of PHP 500 or more, and VAT-registered sellers for every sale. Ask for an invoice in your name and with your Taxpayer Identification Number (TIN). For foreign suppliers, keep their invoice showing supplier, date, amount and service.

How do deductions compare with Hong Kong or Indonesia?

All three allow ordinary business costs. The Philippines stands out with its 40% OSD and the 8% option, but it is strict on invoices and withholding. Compare business expenses in Hong Kong and business expenses in Indonesia.

Related guides

• Philippines tax landscape overview
• Legal forms of business in the Philippines
• Specific taxes in the Philippines: VAT, percentage tax and more
• Tax fraud regulations of the Philippines
• Business expenses in Hong Kong
• Business expenses in Indonesia
• All country tax guides

Sources

• National Internal Revenue Code (RA 8424), Sec. 34 – full text, LawPhil
• TRAIN Law (RA 10963) – OSD, 8% option, VAT threshold – full text, LawPhil
• CREATE Act (RA 11534) – corporate rates, interest deduction – full text, LawPhil
• Ease of Paying Taxes Act (RA 11976) – full text, LawPhil
• RA 12023 (VAT on digital services) – full text, LawPhil
• CREATE MORE Act (RA 12066) – full text, LawPhil
• Foreign Investments Act amendments (RA 11647) – full text, LawPhil
• Philippines corporate deductions – PwC Worldwide Tax Summaries (secondary)

This guide is general information, not personalised tax advice. See how we research and review.