TAX COMPLIANCE FOR YEAR END EXPENSES

1. A business expense must be ordinary and necessary, and must have been paid or
incurred during the taxable year in carrying on the trade or business of the
taxpayer; and must be substantiated with sufficient evidence. Additionally, taxes
required to be withheld from expenses should have been remitted to the BIR in
accordance with the current withholding tax rules.

2. Under Revenue Regulations No. 2-98, otherwise known as the Withholding Tax
Regulations, the obligation to deduct and withhold the tax arises at the time an
income is paid or becomes payable, or when it is accrued or recorded as an
expense or asset in the payor’s books, whichever comes first.

Notably, the proper timing for withholding taxes on expenses arises not only upon
actual payment of such expense. The inclusion of the line, “whichever comes first,”
triggers the taxpayer’s obligation to remit withholding taxes to the BIR even upon
recording such transactions as an expense or asset (e.g., prepaid expenses) in the
books.