Security Deposit vs. Rent: When Does BIR Form 2307 Withholding Actually Apply?

A lump-sum payment collected at lease signing often mixes two different things that BIR Form 2307 treats differently: advance rent, which a tenant withholds on immediately like ordinary rental income, and a refundable security deposit, which is generally not income at all when received and is not subject to expanded withholding tax at that point. The deposit only enters withholding later, if and when it is applied to unpaid rent or forfeited.

This guide is part of the BIR Form 2307 series. For the general 5% rental withholding mechanics this post builds on, see Withholding Tax on Rent: How to Complete BIR Form 2307 for Lessors; for the general payment-vs-accrual trigger rule referenced below, see When Must You Withhold Tax for BIR Form 2307: At Payment or When the Expense Accrues?.

Why aren’t a security deposit and advance rent withheld the same way? #

The two amounts differ in what they represent for the landlord, not in how the lease agreement happens to label them. Advance rent is a prepayment of rental income that is already identified with specific future months — it is income to the landlord once paid, simply received early. A security deposit, by contrast, is collected as a guarantee against unpaid rent or property damage and is expected to be returned to the tenant at the end of the lease if no deduction is warranted; until it is actually applied or forfeited, it sits on the landlord’s books as a liability owed back to the tenant, not as income earned.

Because expanded withholding tax under RR No. 11-2018 only reaches payments that constitute income to the payee, a genuinely refundable deposit stays outside the withholding base at the point it is collected — there is no income item yet for the 5% rental rate to apply to.

Is the refundable security deposit portion subject to withholding when received? #

No — a security deposit that is genuinely refundable at lease end is not rental income to the landlord when received, so a tenant does not withhold expanded withholding tax on that portion at that time. This follows from the same timing logic already established for BIR Form 2307 in When Must You Withhold Tax: At Payment or When the Expense Accrues?: Section 2.57.4 of RR No. 2-98, as amended by RR No. 4-2024, triggers withholding at whichever comes first among actual payment, the payor’s books accrual of the item as an expense or payable, or the seller’s supporting invoice — but all three of those triggers presuppose that the amount is an income payment (an expense to the payor) in the first place. A security deposit that the tenant books as a receivable-back asset, and the landlord books as a liability, is not recorded as rental expense or rental income by either side, so the Section 2.57.4 trigger has nothing to attach to until the deposit’s character changes.

What does trigger withholding on a security deposit:

• The landlord applies part or all of the deposit to unpaid rent for a specific period — at that point it becomes rental income for that period.
• The landlord forfeits the deposit under a lease clause (e.g., early termination, damages) — the forfeited amount becomes income to the landlord when the forfeiture takes effect.
• The lease is restructured so the “deposit” is no longer genuinely refundable and functions as prepaid rent in substance — the label in the contract does not override the substance of the payment for tax purposes.

Until one of those events happens, the deposit remains a balance-sheet item for both parties, and no BIR Form 2307 is issued against it.

Worked example: a two-year commercial lease with advance rent and a security deposit #

A retail tenant signs a two-year commercial lease with a corporate lessor at ₱60,000 gross monthly rent, and the lease requires an upfront payment at signing equal to two months’ advance rent plus two months’ security deposit.

On the advance rent portion, the tenant withholds the standard 5% rental rate under RR No. 11-2018 at the time of payment, since that ₱120,000 is already identified as rental income for the first two months:

The tenant issues BIR Form 2307 for ₱120,000 with ATC WC100 and ₱6,000 withheld, covering the advance rent. The ₱120,000 security deposit is paid in full with no withholding at signing, because it is not yet income to the lessor. If the lease runs its full two years and the tenant leaves the premises undamaged with rent fully current, the lessor returns the ₱120,000 deposit at lease end — an amount that was never rental income and so never generates a BIR Form 2307. If, instead, the lessor applies ₱30,000 of the deposit against damage found at move-out, that ₱30,000 becomes income to the lessor at that point and the tenant withholds 5% on it (₱1,500) the same way it would on any other rental-related payment, issuing a separate BIR Form 2307 for that amount when the deduction is applied.

Frequently asked questions #

Is a refundable security deposit subject to withholding tax when the landlord receives it? #

Generally no. A security deposit that is refundable at the end of the lease is a liability the landlord may have to return, not rental income, so a tenant does not withhold expanded withholding tax on that portion at the time it is received.

Is advance rent treated the same as a security deposit for withholding purposes? #

No. Advance rent is a prepayment of rental income already identified with specific future months, so a tenant withholds the standard 5% expanded withholding tax on the advance rental portion at the time it is paid, the same as ordinary monthly rent, under Revenue Regulations No. 11-2018.

When does a security deposit eventually become subject to withholding tax? #

A security deposit becomes subject to withholding once it stops functioning as a refundable liability and is instead applied to unpaid rent, forfeited as a penalty, or otherwise converted into income for the landlord — at that point it is withheld like any other rental payment for the period it covers.

What if a lease agreement labels an amount a “deposit” but never actually returns it? #

The label in the contract does not control the tax treatment. If a payment described as a deposit is not genuinely refundable and is effectively rent paid in advance, it should be treated and withheld as rental income from the start rather than as a deposit.

Does the payment-vs-accrual timing rule under RR No. 2-98 apply differently to a security deposit? #

The Section 2.57.4 timing rule under RR No. 2-98, as amended by RR No. 4-2024, still governs when withholding is triggered once an amount is actually income — but a refundable security deposit does not trigger that rule at receipt because it is not booked as rental income or an expense payable in the first place, only as a liability.

Summary #

A lease signing payment that bundles advance rent with a security deposit is not one single withholding event — the advance rent portion is withheld immediately at the standard 5% rental rate because it is already rental income for identified future periods, while the refundable security deposit portion stays outside withholding entirely until it is applied to rent, forfeited, or otherwise converted into income under the same timing logic covered in When Must You Withhold Tax for BIR Form 2307. Separating the two amounts on the lease contract and in bookkeeping — rather than treating the whole upfront payment as one lump sum — is what keeps the BIR Form 2307 issued at signing accurate, and avoids either under-withholding on rent or needlessly withholding on money that may simply be returned. See Withholding Tax on Rent for the full rental withholding mechanics this post builds on.