Representation and Entertainment Expense

Representation and entertainment expense are those incurred by the company in the course of
business relative to entertaining or meeting with guests at a dining place, place of amusement,
sporting events and similar events or places as contemplated under RR No. 10-2002.

These are allowed as deduction because it develops a friendlier atmosphere between the taxpayers
and potential clients, guests or employees in order to develop a better business resulting to a higher
income and eventually more taxes.

However, such expenses are subject to the following limitations on its deductibility:

Sellers of Goods- 0.5% of net sales (net of sales returns, discounts and allowances).
Sellers of Services- 1% of gross receipts.
Note:
For taxpayer engaged in the sale of both goods and services, specific identification or segregation has
to be made. Sellers of service enjoy a higher rate because they are more prone to spending
representation and entertainment in dealings with its guests, clients, or customers

The Bureau of Internal Revenue (BIR) allows businesses to deduct certain

expenses from their taxable income. As a rule of thumb, most of these
allowed expenses should be relevant and necessary to business activities,
while including others such as social security contributions and donations to
charitable institutions.
When applying deductible expenses, you may choose between two options:
itemized deductions and optional standard deductions (OSD). Between the
two, the OSD is simpler to compute because your allowable deduction is set
at 40% of your gross sales or receipts, but only itemized deductions will keep
you from paying income tax if your expenses exceed your income. With
itemized deductions, you’ll also have to present receipts as proof of your
deductible expenses. We discuss this in detail in our article ‘Itemized
Deduction vs. Optional Standard Deduction – Find Out What’s Right for You’.
Meanwhile, we cover everything you need to know about deductible expenses
in the following paragraphs.

WHAT EXPENSES MAY BE

DEDUCTED
Below is a list of the deductible expenses allowed by the BIR. However, to
ensure that a certain business expense is indeed allowed, it is important that
you consult with an accountant or a tax professional.
Advertising and Promotions Amortizations Bad Debts

Charitable Contributions* Commissions Communication, Light,

Water

Depletion Depreciation* Director’s Fees*

Fringe Benefits* Fuel and Oil Insurance Interest*

Janitorial / Messengerial Services* Losses* Management /

Consultancy Fee*

Miscellaneous Office Supplies Other Services

Professional Fees* Rental* Repairs and

Maintenance-Labor

Repairs and Maintenance Representation and Research and

(Materials/Supplies) Entertainment* Development

Royalties* Salaries and Allowances* Security Services*

SSS, GSIS, Philhealth, HDMF and Taxes and Licenses* Tolling Fees
Other Contributions*

Training and Seminars Transportation and Travel Others (case to case

basis)

* See additional notes on mouse-over

CRITERIA FOR ALLOWABLE

DEDUCTIONS
While the list above shows what expenses may be deducted, you must
ensure that these meet the following criteria set by the BIR:
The Expense Must be Business-Related. As we mentioned earlier, majority
of deductible expenses allowed must be relevant and necessary to the
business. These are typical disbursements that your business needs in order
to operate. So if you are running a tarpaulin printing business, for example, a
valid business expense may include your purchase of ink and the
maintenance of your printer. That said, personal expenses are naturally
excluded from allowable deductions.
It Must be Presented with Supporting Documents. This one applies to
itemized deductions. In order for an expense to be deducted, you must show
proof of the said expense such as a receipt or sales invoice. However if you
opt for the OSD, you aren’t required to present any proof to substantiate the
40% deduction.
It Must not be Illegal, Immoral, and not Against Policy and Order. Any
illegal activity is automatically excluded from deductible expenses.
The Amount Deducted Must be Reasonable. There’s a ceiling to certain
expenses such as the Representation and Entertainment expense, which is
capped at 0.5% of net sales for those who sell goods and 1% of revenues for
service providers.
For OSD, the allowable deductible expense is automatically limited to 40% of
your gross sales or receipts.
Withholding Taxes Must Have been Paid
In the above list, you’ll also see certain deductible expenses that are subject
to withholding taxes. You must pay the corresponding tax to the BIR first
before you can claim them as a deductible expense. Withholding taxes must
also be paid whether you choose itemized deductions or the OSD.

HOW TO ENSURE YOUR

COMPLIANCE TO RULES ON
DEDUCTIBLE EXPENSES
Expenses that you can deduct from your gross income and the criteria of what
is considered a deductible expense are fairly clear and straightforward.
However, there may be some instances where exclusions would apply,
creating a potential for confusion and issues with the BIR during tax season.
Because of that, it may be ideal to work with accountants and tax
professionals who can help you navigate through the complexities of the tax
system, so you can pay the right taxes and prevent compliance issues today
and in the future. For more information, contact us today about your services
at Beyond D Numbers, from tax compliance to payroll services.