Personal, Living, and Family Expenses Are Not Deductible: NIRC Section 36(A) Explained With a Freelancer Example
NIRC Section 36(A) bars four categories of deduction “in any case”: personal, living or family expenses; amounts paid for permanent improvements; amounts spent restoring property that already carries a depreciation allowance; and life insurance premiums on an officer or employee when the taxpayer is a beneficiary. For a sole proprietor, freelancer, or small corporation, the first category is the one the Bureau of Internal Revenue (BIR) most often disallows during an audit of itemized deductions.
Prepare Your Year-End BIR Files FREE →What does NIRC Section 36(A) say about non-deductible expenses? #
NIRC Section 36(A) is the general rule on items that cannot be deducted when computing net income. It sits right after the deductions in Section 34 and overrides them: an expense can look “ordinary and necessary” and still fail if it falls in one of the four listed categories. The operative text reads:
“(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to - (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; … (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.”
— Section 36(A), National Internal Revenue Code (Republic Act No. 8424), as posted by LawPhil. The ellipsis marks the omitted sentence on intangible drilling and development costs in petroleum operations.
Which expenses count as personal, living, or family expenses? #
Personal, living or family expenses are costs that serve the taxpayer’s household rather than the business: groceries, home utilities, tuition for a child, and personal subscriptions. The Code does not list examples, so the test is purpose. If the same cost would exist with or without the business, it is personal and Section 36(A)(1) disallows it. See also what counts as an ordinary and necessary business expense.
Mixed-use costs need a business-use portion that can be supported. A home office, for example, is covered in Home Office Expense Deduction for Freelancers. Without a documented business share, the whole amount risks falling under Section 36(A)(1).
What about permanent improvements and restored property? #
Section 36(A)(2) and (3) stop a taxpayer from expensing a capital outlay in one year. A permanent improvement that increases a property’s value is capitalized, and its cost is recovered through depreciation or amortization instead. Spending that merely restores property for which a depreciation allowance “is or has been made” is not a second deduction on top of that allowance.
For the recovery side, see Depreciation Expense Deduction Under NIRC Section 34(F) and Leasehold Improvements: Outright vs Spread-Out Treatment.
Worked example: a freelancer’s expense list #
Ana Reyes, a freelance designer who elected itemized deductions, lists six items on her year-end schedule. Applying Section 36(A) produces this result (all figures fictional):
| Item claimed | Amount (₱) | Section 36(A) result | Allowed this year (₱) |
|---|---|---|---|
| Coworking membership | 60,000 | Business cost, no bar | 60,000 |
| Laptop depreciation | 30,000 | Depreciation allowance, no bar | 30,000 |
| Business share of internet and phone | 24,000 | Business cost, no bar | 24,000 |
| Household groceries | 48,000 | Barred by (A)(1) | 0 |
| Premium on a policy insuring her studio manager, with Ana as beneficiary | 40,000 | Barred by (A)(4) | 0 |
| Permanent renovation of a rented studio | 150,000 | Barred as a lump-sum expense by (A)(2); capitalize and recover over time | 0 (capitalized) |
| Total | 352,000 | 114,000 |
Of the ₱352,000 claimed, ₱114,000 survives in the current year, ₱88,000 is disallowed permanently (groceries and the key-person premium), and ₱150,000 moves to the capitalized-asset schedule. Claiming all ₱352,000 would overstate deductions by ₱238,000 in the year of the return.
How to avoid disallowance #
- Pay business costs from a business account or keep a separate ledger for them.
- Keep official receipts or invoices in the business’s name; see What to do when you have no receipts.
- Allocate mixed-use costs with a written basis (floor area, hours of use) and apply the business share only.
- Capitalize improvements and run them through depreciation or amortization.
- Compare itemizing against the flat deduction in Optional Standard Deduction vs Itemized Deductions; under the optional standard deduction (OSD), no itemized list is needed at all.
Summary #
NIRC Section 36(A) disallows personal, living or family expenses, permanent improvements, restoration of already-depreciated property, and key-person life insurance premiums where the taxpayer benefits. Separate personal from business spending, capitalize improvements, and document business-use percentages. The quoted text comes from RA 8424 as posted by LawPhil; confirm against the current consolidated Code before relying on it for a specific return.
Frequently asked questions #
Can a sole proprietor deduct personal groceries or household bills as business expenses? #
No. NIRC Section 36(A)(1) disallows personal, living or family expenses “in any case” when computing net income. A cost that exists regardless of the business, such as household groceries, cannot be deducted even if it is paid from business funds.
Is a renovation of my rented shop deductible in the year I pay for it? #
Not as a lump sum if the work is a permanent improvement or betterment. NIRC Section 36(A)(2) disallows amounts paid for permanent improvements that increase the value of property, so the cost is capitalized and recovered through depreciation or amortization over time.
Can a company deduct life insurance premiums on its employees? #
Not when the company is directly or indirectly a beneficiary of the policy. NIRC Section 36(A)(4) disallows premiums on a policy covering an officer, an employee, or a person financially interested in the business when the taxpayer is a beneficiary.
Does Section 36(A) apply if I choose the optional standard deduction? #
It matters less, because the optional standard deduction replaces itemized deductions with a flat percentage. Section 36(A) governs the itemized method, where each claimed expense must survive scrutiny line by line.
How should I handle an expense that is partly personal and partly business? #
Allocate it with a documented basis, such as floor area or hours of use, and deduct only the business share. The personal share falls under NIRC Section 36(A)(1) and is not deductible.