Which Taxes Can You Deduct From Business Income? NIRC Section 34(C) and Its Four Exceptions

NIRC Section 34(C)(1) allows a deduction for taxes paid or incurred in connection with your profession, trade, or business, except income tax, foreign income tax you choose to credit, estate and donor’s taxes, and assessments for local benefits. The Code lists exclusions, not inclusions, so a business-related tax that is not excluded is deductible, provided you itemize deductions rather than elect the optional standard deduction.

What does NIRC Section 34(C)(1) say? #

NIRC Section 34(C)(1) states the general rule and four exceptions in a single sentence. It also contains a proviso that treats later refunds as income. The text reads:

“(C) Taxes. - (1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor’s taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.”

— Section 34(C)(1), National Internal Revenue Code (Republic Act No. 8424), as posted by LawPhil. The 2017 TRAIN Law (RA 10963, Section 11) re-enacted Section 34 amending its opening paragraph and subsection (L), and marks the other subsections, including (C), as unchanged (“x x x”).

Which taxes are excluded from the deduction? #

Four categories are excluded:

• Income tax under Title II of the Code, including the income tax you pay on the same income.
• Foreign income taxes, unless you choose not to claim the foreign tax credit in your return.
• Estate and donor’s taxes, which are transfer taxes unrelated to running a business.
• Taxes assessed against local benefits that increase the value of the property, such as a special assessment for a road improvement that raises land value.

For the foreign tax credit alternative, see Foreign Tax Credit Under NIRC Section 34(C).

Are real property tax and local business tax deductible? #

By the text, yes when they are connected with the business. Neither appears in the four exceptions, and the rule allows taxes “paid or incurred … in connection with the taxpayer’s profession, trade or business.” This is a reading of the statute’s structure, not a quoted example from the Code. The tax must also be paid or incurred within the taxable year and properly recorded, and the deduction is available only to a taxpayer who itemizes rather than elects the optional standard deduction.

Worked example: classifying a year of tax payments #

Ben Tan operates a hardware store as a sole proprietor and itemizes his deductions. His tax payments for the year are (fictional figures):

Deductible taxes total ₱43,000 (₱18,000 + ₱25,000). If the city later refunds ₱5,000 of the local business tax, the proviso adds that amount to gross income in the year of receipt “to the extent of the income tax benefit” of the earlier deduction.

How to handle this on your return #

1. Separate tax payments by type in your ledger before closing the year.
2. Exclude income tax, transfer taxes, and benefit assessments from the itemized list.
3. Keep official receipts for each deducted tax, as explained in what to do when you have no receipts.
4. If you elect the flat deduction instead, none of these taxes is separately claimed; compare methods in Optional Standard Deduction vs Itemized Deductions.
5. Review other deduction rules in Ordinary and Necessary Business Expenses.

Summary #

NIRC Section 34(C)(1) allows taxes paid or incurred in connection with a profession, trade, or business as a deduction, except income tax, foreign income tax (if credited), estate and donor’s taxes, and local-benefit assessments. Refunds of deducted taxes are income to the extent of the earlier benefit. The quoted text comes from RA 8424 as posted by LawPhil; verify against the current consolidated Code before applying it.

Frequently asked questions #

Can I deduct the income tax I pay from my business income? #

No. NIRC Section 34(C)(1)(a) excludes the income tax imposed under Title II of the Code from the deduction for taxes.

Are estate tax and donor’s tax deductible as business expenses? #

No. NIRC Section 34(C)(1)(c) excludes estate and donor’s taxes, since they are transfer taxes and not costs of the profession, trade, or business.

Can I deduct foreign income taxes? #

Only if you do not signify in your return that you want the foreign tax credit. NIRC Section 34(C)(1)(b) allows the deduction for a taxpayer who does not claim the credit benefits.

What happens if a deducted tax is refunded later? #

The refund or credit is included in gross income in the year of receipt, to the extent of the income tax benefit of the earlier deduction, under the proviso to NIRC Section 34(C)(1).

Can I deduct taxes if I elected the optional standard deduction? #

Not separately. The optional standard deduction replaces itemized deductions with a flat percentage, so individual tax payments are not claimed line by line.