The fine line between guidance and burden in RMC 81-2025

Over the years, the standards for what qualify as ordinary and necessary business expenses have been shaped by both the Tax Code and numerous court decisions.

- PATRICIA S. MENDOZA

To clarify these rules, the BIR issued Revenue Memorandum Circular (RMC) 81-2025, reiterating the criteria for deductibility. While the circular is intended to promote consistency, it raises an important question: Was such reiteration truly necessary, or does it risk introducing new ambiguities and compliance burdens that may complicate, rather than simplify, tax administration?

The self-assessment principle underlying the “pay as you file” rule requires taxpayers to accurately compute their taxable income and substantiate all business expense deductions with proper supporting documents. RMC 81-2025 reinforces the importance of compliance with these requirements to ensure proper application of tax laws.

Ordinary and necessary

An ordinary expense is one that is normal and customary for business, while a necessary expense is appropriate, helpful, and directly tied to operations. On paper, these definitions appear straightforward.

However, the RMC introduces the concepts of reasonableness and proportionality, requiring that expenses be reasonable in amount and proportionate to overall operations. This can be interpreted in two ways: one view suggests that unusually large expenses are automatically suspect, while another allows the expense if it is an industry norm, directly tied to income generation, and properly documented. This ambiguity creates uncertainty for taxpayers about how their expense claims will be evaluated.

This is especially problematic for businesses with essential costs in large amounts. If the BIR were to disallow these expenses solely because of the value or magnitude, it would distort the company’s actual profitability and unfairly penalize legitimate business activity. Ultimately, the focus should be on whether an expense is necessary, reasonable, customary, and properly substantiated—not merely on the amount.