The Philippine tax regulations provide legal ways to lower your income tax. By understanding allowable tax deductions, small businesses can reduce their taxable base and reinvest those savings into growth.

With the CREATE MORE Act’s enhanced deductions and the Ease of Paying Taxes (EOPT) Act’s removal of old barriers, such as the strict withholding requirement for deductibility, it is now simpler to claim what you're owed.

Whether it’s maximizing deductions or claiming exemptions, there are smart ways to reduce your taxable income legally. Here are 9 practical strategies your small business can use this year.

Paying less tax isn’t about shortcuts — it’s about understanding the deductions, incentives, and strategies available to your small business.

Here are nine BIR-compliant ways small businesses can legally reduce income tax and boost their bottom line.

Small businesses that take out a loan to buy equipment, fund daily operations, or expand their office can deduct the interest expense they pay from their gross income.

Good news, right? Especially if you usually borrow funds to invest in your business’s growth and development.

You may also deposit these funds in a bank to steadily earn interest income. This allows small businesses to enjoy double tax benefits. That is a reduced income tax because of the interest expense deduction and lower tax liability on the interest income.

To prevent this tax arbitrage, the Philippine Tax Code limited the deductibility of interest expense. For taxpayers paying the 25% corporate income tax (CIT) rate, the deductible interest expense is reduced by an amount equivalent to 20% of the interest income subjected to final withholding tax

However, under the CREATE MORE Act and RMC No. 19-2024, the 20% tax arbitrage limit on interest expense deduction is effectively waived for businesses subject to the 20% CIT rate, allowing them to deduct interest expenses in full without reduction.

It is important to note, too, that the Ease of Paying Taxes Act (RA No. 11976) repealed the requirement that withholding final tax is a prerequisite to claiming the interest expense deduction. However, withholding on interest income itself remains mandatory.

This means taxpayers must still withhold the appropriate final tax on interest income earned, but failure to withhold no longer disqualifies the interest expense deduction.

Utility expenses, such as electricity, water, and internet, provided these are ordinary and necessary expenses related to your business, can all be deducted from taxable income. But with the Ease of Paying Taxes (EOPT) Act, you must ask for a Sales Invoice instead of just an Official Receipt to claim these expenses as tax deductions.

In 2026, the biggest change for utility expenses isn't what you can deduct, but how you prove it. Official receipts are no longer the primary document for claiming deductions for your business’s utilities.

Here are some important notes to consider:

• Invoice Rule: Only a Sales Invoice counts as proof for your tax savings. Official Receipts are for your records only and cannot be used to claim these deductions.
• Name Match: Ensure the bill is under your Business Name. If it’s in your personal name, the BIR will not let you skip the tax.
• Work-from-Home: You can subtract home utility costs from your taxes as long as you only claim the amount that is attributable to the business.

As employers, you must pay your employees’ monthly contributions to SSS, Pag-IBIG, and PhilHealth as part of the mandatory benefits required by the Labor Code of the Philippines.

Luckily, government contributions to SSS, Pag-IBIG, and PhilHealth are deductible expenses you can use to lower your income tax liability. The first step is registering your business and becoming an eligible employer member of these agencies. Once done, you must remit both the employee and employer share of these contributions.

The amounts taken from employees and employers vary from agency to agency. Always check the updated contribution rates for each to ensure you’re making the correct payments.

For 2026, the updated contribution rates for SSS, PhilHealth, and Pag-IBIG in the Philippines are as follows:

Since you are taking the employee share directly from their salary, you can only use the employer share expense as a deductible for your income tax.

Aside from the mandatory benefits, offering additional perks, such as de minimis benefits and fringe benefits, can also reduce your income tax. These tax-efficient benefits also boost employee satisfaction, retention, and productivity.

Small-value, occasional employee perks are classified as de minimis benefits. Whereas fringe benefits are non-cash benefits or privileges given to employees that exceed de minimis thresholds.

Both kinds of benefits serve as tax-efficient tools to optimize overall compensation costs.

De minimis benefits, which are exempt from income tax and fringe benefits tax (FBT), offer a cost-effective way to enhance employee compensation without an additional tax burden for both the employer and the employee.

On the other hand, even when employers pay the 35% FBT, the cost of providing fringe benefits remains deductible as a business expense, thereby reducing the employer’s overall taxable income.

This means that despite the FBT payment, fringe benefits remain a tax-efficient way to compensate employees while lowering the employer’s income tax liability.

• These are small-value benefits given to employees that are exempt from income tax and fringe benefit tax.
• They are considered minimal and occasional, intended to provide practical support without a significant tax burden.
• Examples include rice subsidies, clothing allowances, medical cash allowances, and gifts within prescribed limits.
• The BIR’s RR No. 29-2025 sets specific ceilings for these benefits, and as long as the benefits do not exceed these limits, they remain tax-exempt.
• If the value exceeds the prescribed ceiling, the excess amount becomes taxable.

• Additional non-cash benefits or privileges granted regularly or as part of compensation, providing significant economic value beyond basic salary.
• Higher value benefits that are usually granted to managerial and supervisory employees.
• Examples include company cars, housing, club memberships, and other non-cash benefits.
• Exempt from income tax for employees but subject to FBT paid by the employer.
• The current FBT rate is 35% of the grossed-up monetary value of the fringe benefits.

Having someone represent your company in meetings, conferences, or travels is also typical in business. These representation expenses include flight tickets, hotel bookings, and meal expenses during the event.

You may even offer entertainment or recreational activities like parties, team-building activities, or dinner events to show your clients and employees appreciation, which also means higher spending.

The good thing is these representation and entertainment expenses are deductions you can use to lower your tax liability.

Just like the other deductions, remember to properly document these expenses and ensure they are within a reasonable amount.

As per BIR regulations, you should note that this deduction is capped at 0.5% of net sales if you sell goods or 1% of net revenue if you sell services.

This video reiterates the importance of having the right supporting documents on hand:

Sometimes, customers don't pay their bills, no matter how many times you ask. While this is frustrating for your cash flow, the BIR actually allows you to use these "bad debts" to lower your tax bill.

By officially declaring an invoice as uncollectible, you can subtract that amount from your income. This will result in tax savings instead of paying taxes on money you never actually received.

But before doing so, you should first exhaust all your options in trying to collect the debt. You can repeatedly send invoices, contact customers, send demand letters, and even file a collection case.

If the debt remains unpaid after all these efforts, you can now prove it as uncollectible and deduct it from your income.

Another way to lower your taxable income is by treating asset depreciation as an expense. Typically, you can use a straight-line method to compute depreciation.

However, to accelerate depreciation in the early years of the life of an asset, a recommended method is the double-declining balance (DDB) method. Lower your taxable income during the first business years through the DDB method, especially for assets that quickly depreciate, like cars.

You can also use charitable donations as another tax deduction to lower your tax liability. Generally, this deduction is only 5% of your net income.

However, 100% of your donations can be deducted if you donate to non-government organizations accredited by the BIR as a donee institution. Here is a list of accredited NGOs along with the validity of their BIR donee status.

Donating to the government or its priority projects also means a full deduction from your gross income. The priority projects are those under the National Priority Plan determined by the National Economic Development Authority (NEDA).

On top of reducing your income tax, you’ll also help out communities and support different advocacies.

Just note that a 6% donor’s tax may be imposed when you exceed the ₱250,000 donation amount for each taxable year.

If you’re only starting or growing your business and have less than ₱3 million in assets, you can register your business as a Barangay Micro Business Enterprise (BMBE). You can enjoy exemption or reduced local taxes or fees depending on your local government.

By becoming a BMBE, you can enjoy different perks, such as being exempt from paying income tax. Other advantages include exemption from the Minimum Wage Law, priority access to a specific credit window, and training and assistance from various agencies.

The BMBE status is valid for 2 years and can be renewed if you meet the eligibility requirements, including the ₱3 million asset limit.

However, while exempt from paying income tax as a BMBE, you must still file your annual income tax return, reporting zero tax due.

In addition to standard money-saving tips, small business owners in 2026 can benefit from even more aggressive tax relief thanks to the CREATE MORE Act (Maximize Opportunities for Reinvigorating the Economy), which builds upon the original 2021 CREATE Act (RA 11534).

• If your business is a domestic corporation with net taxable income of PHP 5 million or less, you benefit from a 20% CIT rate.
• The 25% CIT Rate applies to all other domestic and foreign corporations, down from the historical 30%.
• The Minimum Corporate Income Tax (MCIT) is back at 2% of gross income, starting in the 4th taxable year of operation, only if your regular income tax (20% or 25% of net income) is lower than 2% of your gross income.
• VAT exemptions or zero-rating may apply if your business qualifies under the CREATE MORE Act provisions.
• Keep up to date on other incentives, such as enhanced deductions and income tax holidays, that may apply to your industry or project.

Staying on top of your deductions through strategic tax planning is one of the best ways to keep more of your hard-earned money and lower your corporate income tax. By being proactive, you don't just save on taxes—you build a stronger, more stable business for the future.

With OneCFO’s fractional CFO expertise, you don't just stay on time with the BIR—you gain a financial partner who builds your tax optimization roadmap to protect your cash flow and fuel your business growth.

Watch: A deep dive into our strategic financial value for SMEs and startups:

Visit us at onecfoph.co or email our team at [email protected].

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