What are the requisites of deductible expenses

Every business industry essentially runs for a profit. Owners/managers assure that business operations must always result in a generation of revenue or positive cash flow. But, how do we deal with profit? Let’s go back to the principles of accounting, the famously so-called debit and credit. Since we want to gain profit on our side of the business, we must also give something to our clients in the form of either or both goods and/or services.

But since our resources are not made for free, we also make cash outflows in the form of purchases or expenses. In this scenario, purchases are now made as one item for the tax deductibility in the preparation of tax compliance to the government.

The tax deduction is a reduction in the income of one’s business so that the tax due will be reasonably lowered due to the valid form of expenses that is properly accounted for. There are varieties of ways on how to claim deductions. But first of all, let us know what are the classifications of deductions so that we can gradually understand how to differentiate expenses one from the other.

Expenses are categorized into the deductible and non-deductible for the purposes of claiming tax incentives for individual taxpayers as well as non-individual organizations.

We must know what are truly those expenses that seem beneficial for the entrepreneurs, businessmen, or other proprietors in gaining a tax incentive or tax benefit. As an overview, expenses are inevitable in every business industry.

For an expense to be claimed as deductible for income tax purpose, the following requirement must be present:

In order to be classified as a deductible expense, it must be for the purpose of the conduct of a trade or business or even a practice of the profession. Personal living expenses are not necessary for carrying on a trade or business and therefore cannot be claimed as a deductible expense.

Although an expense is incurred in carrying on a trade or business, it will still be disallowed by the tax authority if no sufficient substantiation is presented. Every purchase a business make must be supported by an official receipt or sales invoice registered by the Bureau of Internal Revenue.

Unsupported expenses or expenses with no receipts or invoices presumes that it is not existing in the first place and therefore is not valid. This is one way of protecting our tax system from having taxpayers who overly claims for expenses just to minimize taxable profit.

As a general rule, there is no limitation as to the amount of expense, however, it must be reasonable. Representation expense amounting to 380,000 of a retail store whose gross sales is 750,000 is quite unreasonable. To avoid this, the tax code set rules on limitations on certain expenses: