General disclaimer: This is for information and education only and is not a substitute for advice from your own lawyer or tax adviser. Tax rules change frequently and are applied based on the specific facts of each case.

I. Why “Cost of Services” Matters for Real Estate Intermediaries

For Philippine tax purposes, real estate intermediaries (brokers, salespersons, marketing companies, leasing agents, property managers, etc.) are generally classified as service providers.

Under the National Internal Revenue Code (NIRC), as amended, the concept of “cost of services” is important because:

For taxpayers engaged in the sale of services, gross income is defined as:

Gross income = Gross receipts − Cost of services

This affects:
- Regular income tax (since taxable income is computed starting from gross income),
- For corporations, the base of the minimum corporate income tax (MCIT) (where applicable),
- Financial reporting (profit margins, pricing, etc.), and
- Internal management decisions (how much commission to give, how much overhead is sustainable).

In short, getting “cost of services” right is not just an accounting exercise; it is a tax and compliance issue.

II. Who Are “Real Estate Intermediaries” for Tax Purposes?

Common examples include:

Licensed real estate brokers (individuals or corporations),
Real estate salespersons (usually under a broker),
Marketing and brokerage firms selling units for developers or owners,
Leasing agents brokering lease contracts,
Property managers (managing condos, buildings, subdivisions for a fee),
Real estate consultants/appraisers (for valuation and advisory services).

They can be:

Individuals (professional/self-employed, or sole proprietors),
Corporations/Partnerships (e.g., a realty corporation, brokerage company),
Either VAT-registered or subject to percentage tax (non-VAT), depending on gross sales/receipts and voluntary registration choices.

III. Basic Tax Framework

Before computing cost of services, it helps to place it in the broader computation:

1. For individual brokers / real estate intermediaries

Two big income tax regimes (for self-employed and professionals with business income):

Graduated income tax rates on net taxable income – where you can choose:
- Itemized deductions, or
- Optional Standard Deduction (OSD).
8% income tax on gross sales/receipts minus ₱250,000, instead of graduated rates + percentage tax (subject to conditions: not VAT-registered, not exceeding VAT threshold, etc.).

Cost of services is directly relevant only when using itemized deductions.

Under OSD, you deduct a flat percentage of gross sales/receipts; you do not compute actual cost of services.
Under 8%, you also do not compute cost of services for income tax; tax is based on gross receipts (with the statutory reduction).

However, even if not needed for income tax, cost information is still useful for:

Bookkeeping,
Pricing,
LGU business tax computation practices (some LGUs may ask for income statements),
Bank loan applications.

2. For corporations/partnerships

Corporations engaged in real estate service business:

Pay regular corporate income tax (CIT) on taxable income (net of all allowed deductions),
May be subject to MCIT based on gross income, where:

Gross income = Gross service revenue − Cost of services

So, classification of costs as “cost of services” vs “operating expenses” can affect the MCIT base (although total allowable deductions remain important for regular CIT).

3. VAT or Percentage Tax

For VAT-registered intermediaries:

VAT is based on gross receipts (output VAT) from taxable services.
Cost of services does not reduce the VAT base.
But input VAT on cost items (e.g., advertising, rentals, utilities, fuel) may be creditable, subject to rules.

For non-VAT intermediaries subject to percentage tax:

Percentage tax is based on gross receipts (again, not net of cost of services).

So cost of services affects income tax (and MCIT) not VAT or percentage tax base.

IV. Legal Concept of “Cost of Services”

Under the NIRC and BIR issuances, for a taxpayer engaged in the sale of services, “cost of services” generally refers to all direct costs and expenses necessarily incurred to provide the service and earn the related revenue.

Key ideas:

Must be directly attributable to the services rendered;
Must be ordinary and necessary in the trade or business;
Must be properly substantiated (official receipts, invoices, contracts, payroll records, etc.);
Should be net of any VAT component claimed as input VAT (for VAT taxpayers).

V. Typical Income Streams of Real Estate Intermediaries

Before listing cost items, it’s helpful to know what “gross receipts” usually contain:

Sales commissions from developers or property owners (sale of lots, condos, houses),
Override commissions or overriding incentives (extra percentage if targets hit),
Professional fees (consultancy, valuation, project feasibility),
Leasing commissions (for closed lease contracts),
Retainer fees (for ongoing property management or leasing),
Referral fees (referring clients or projects),
Miscellaneous service fees (e.g., documentation assistance fees, marketing fees).

Gross receipts usually means the gross amount due under the contract, before withholding taxes and exclusive of VAT (for VAT taxpayers).

VI. What Qualifies as “Cost of Services” for Real Estate Intermediaries?

While exact classification can vary by entity and accounting policy, the following are commonly treated as cost of services for a real estate intermediary:

1. Commissions and shares to salespersons / subagents

Portions of commission income paid out to:
- Sub-brokers,
- Salespersons,
- Freelance agents,

Example: Broker receives a 5% commission from the developer and shares 3% to the salespersons. The 5% is gross service revenue; the 3% paid out is cost of services.

2. Salaries and related costs of staff directly rendering brokerage services

Basic salaries and commissions of in-house agents and brokers,
Mandatory contributions shouldered by the employer (SSS, PhilHealth, Pag-IBIG, ECC),
13th month pay and other direct benefits for service staff.

These are often classified as “direct labor” in service entities.

3. Direct marketing and selling expenses

When clearly traceable to specific projects or service engagements, such as:

Advertising and promotion for particular projects (banners, flyers, social media ads paid for specific listings),
Booth rentals in malls or exhibits for a specific project,
Launch events and open house activities for particular developments.

If they are general corporate branding or for the whole brokerage firm, they might be treated as operating expenses rather than cost of services.

4. Transportation and travel directly attributable to service delivery

Costs related to site trippings and client meetings:

Fuel and toll fees for vehicles used to bring clients to project sites,
Transportation allowance to agents for specific viewing trips,
Parking fees directly related to client meetings or site visits.

Again, if the transportation is general in nature (e.g., admin staff’s daily commute allowance), it is typically operating expense.

5. Rentals related to service operations

Rent of project-based kiosks or temporary showrooms,
Rental of storage or display spaces for property marketing materials.

Office rent may be split between service-related and administrative, depending on how space is used. In practice, many entities classify general office rent under operating expenses.

6. Depreciation and amortization of assets used directly in service delivery

Depreciation of vehicles used primarily for client site trippings,
Depreciation of computers, tablets, or equipment used directly by service staff,
Amortization of leasehold improvements for project-based offices.

For tax purposes, depreciation must comply with BIR rules (useful life, method, substantiation).

7. Direct professional fees and subcontracted services

Fees of other professionals (e.g., surveyors, appraisers) hired to deliver part of the service promised to the client,
Outsourced marketing or advertising services for specific projects.

8. Direct taxes and licenses (if contractually borne by intermediary)

Sometimes the intermediary may shoulder certain costs:

Specific permits or licenses required to market a particular property or project,
Documentary requirements or certifications which are contractually assumed by the intermediary.

If they are directly tied to earning the service income, they may be considered cost of services; otherwise, they are usually operating expenses.

VII. What is Not Usually Treated as Cost of Services

These are still deductible business expenses (if properly substantiated and ordinary/necessary) but typically classified as operating expenses rather than cost of services:

General office rent (for head office),
Salaries of administrative and accounting staff,
Utilities (electricity, water, internet for administration),
Office supplies and general printing,
Legal and audit fees,
General corporate advertising and branding,
Interest expense (subject to specific tax rules),
Representation and entertainment not directly chargeable to a specific project.

For income tax, whether an allowed deduction is cost of services or operating expense doesn’t change total taxable income (except for MCIT computations). For financial reporting, it affects gross profit margin vs operating margin.

VIII. Step-by-Step: Computing Cost of Services and Taxable Income

Scenario A: Individual broker using itemized deductions

Facts (hypothetical for one taxable year):

Gross commissions from developers: ₱3,000,000
Shares to salespersons: ₱1,200,000
Salaries/benefits of in-house agents: ₱400,000
Project-based advertising (specific condo project): ₱100,000
Transportation for site trippings: ₱80,000
Office rent (general): ₱300,000
Admin staff salaries: ₱200,000
Other operating expenses (utilities, supplies): ₱120,000

Step 1: Compute Cost of Services

Treat as cost of services:

Commissions to salespersons: ₱1,200,000
In-house agent salaries/benefits: ₱400,000
Project-based advertising: ₱100,000
Site tripping transportation: ₱80,000

Total cost of services = ₱1,200,000 + ₱400,000 + ₱100,000 + ₱80,000 = ₱1,780,000

Step 2: Compute Gross Income

Gross income = Gross receipts − Cost of services = ₱3,000,000 − ₱1,780,000 = ₱1,220,000

Step 3: Deduct Operating Expenses (Itemized)

Operating expenses:

Office rent: ₱300,000
Admin salaries: ₱200,000
Other operating expenses: ₱120,000

Total operating expenses = ₱620,000

Step 4: Compute Net Taxable Income

Taxable income = Gross income − Operating expenses = ₱1,220,000 − ₱620,000 = ₱600,000

This ₱600,000 will be subjected to the graduated income tax rates (plus any other applicable rules and personal exemptions as structured by the current law).

Scenario B: Individual using OSD (Optional Standard Deduction)

Same gross receipts: ₱3,000,000 Under OSD, you do not compute cost of services or actual expenses. Instead, you deduct a statutory percentage of gross (e.g., 40% of gross sales/receipts – check the applicable rules and percentages).

Taxable income (before personal exemptions) = Gross receipts − OSD

Here, cost of services is irrelevant for tax computation, but you may still track it internally.

Scenario C: Individual using 8% income tax on gross

If qualified and opted-in:

Tax base = Gross receipts − ₱250,000 (subject to limitations in the law) Income tax = 8% × Tax base

Here again, no cost of services computation for income tax purposes, but bookkeeping still matters.

Scenario D: Corporation subject to CIT and MCIT

If a brokerage corporation earns:

Gross service revenue: ₱10,000,000
Cost of services: ₱6,000,000
Operating expenses (admin, overhead, etc.): ₱2,500,000

Then:

Gross income (for MCIT)

Gross income = ₱10,000,000 − ₱6,000,000 = ₱4,000,000

MCIT (at whatever rate is applicable under the law at the time) is computed on this ₱4,000,000.
Taxable income (for regular CIT)

Taxable income = Gross income − operating expenses = ₱4,000,000 − ₱2,500,000 = ₱1,500,000

Regular CIT is applied to ₱1,500,000.

The corporation compares the regular CIT vs MCIT and pays whichever is higher, subject to current rules.

Note how the classification of direct costs as “cost of services” directly affects the MCIT base.

IX. Special Topics and Common Issues

1. Withholding tax on commissions and fees

When a broker receives income from a corporation or developer, that payor often withholds expanded withholding tax (EWT) on the commission or fee.

Example:

Gross commission: ₱100,000
Withholding tax (say, 10%): ₱10,000
Net cash received: ₱90,000

For tax purposes:

Gross receipts = ₱100,000 (not ₱90,000),
The ₱10,000 withheld is recorded as “Creditable Tax Withheld at Source”, which can be used as a tax credit against income tax due,
Withholding tax is not cost of services.

2. Reimbursable expenses

Sometimes the broker advances costs (e.g., advertising, transportation) that are reimbursed by the developer or client.

If the broker is merely a collecting agent, and the expenses are reimbursed at exact amount with proper documentation:
- The reimbursement may be treated as recovery of expenses and not additional income; the related costs are likewise not deductions (or are netted).
If the reimbursement is lump-sum or with mark-up, it may be viewed as part of gross income, and the related expenses should be recorded as cost of services or operating expenses.

Proper documentation and contract terms are crucial to support the treatment.

3. VAT treatment of cost of services

For VAT-registered intermediaries:

Output VAT is computed on gross receipts for taxable services.
Cost of services does not reduce the output VAT base.
VAT separately recognized on purchases (input VAT) may be creditable against output VAT if supported by VAT invoices/ORs and if the purchases are attributable to taxable activities.

The expense recorded (for cost of services or operating expense) is usually exclusive of VAT if the VAT is claimed as input tax.

4. Allocation of mixed costs

Some expenses benefit both service delivery and administration (e.g., office utilities, rent, communications).

Taxpayers may adopt reasonable allocation bases:
- By floor area (for rent),
- By number of staff per department (for utilities or supplies),
- By time spent or revenue proportion.

The important thing is that the basis is reasonable, consistent, and well-documented.

5. Documentation Requirements

To support cost of services for deduction:

Official receipts (ORs) and VAT invoices (for purchases of goods or services),
Contracts / engagement letters with clients and developers,
Payroll records, time records for employees,
Commission statements and acknowledgment receipts with subagents/salespersons,
Bank statements and payment vouchers,
Books of accounts duly registered with the BIR,
Proper financial statements signed by an independent CPA, if required.

Without sufficient substantiation, BIR may disallow the cost items, increasing taxable income.

6. Local Government (LGU) business taxes

LGUs usually impose business tax on gross receipts of service providers. While cost of services does not reduce the LGU tax base, LGUs may ask for financial statements or books where cost of services must still be properly recorded.

X. Practical Tips for Real Estate Intermediaries

Clearly separate direct and indirect costs in your chart of accounts:
- Use specific accounts like “Commissions Paid to Agents,” “Project-Based Marketing Expenses,” “Site Tripping Expenses” under Cost of Services.
- Use “Admin Salaries,” “Office Rent,” “General Advertising” under Operating Expenses.
Maintain project-specific records when engaged in multiple developments:
- Helps in showing BIR that certain costs are directly attributable to certain projects, justifying their treatment as cost of services.
Align financial and tax reporting, but be aware they are not always identical:
- Financial reporting may follow PFRS/PFRS for SMEs; tax rules sometimes differ (e.g., in allowable depreciation, non-deductible expenses).
- Maintain tax reconciliation schedules.
Review contracts carefully:
- Clarify whether certain costs are to be borne by the intermediary or reimbursed by the client or developer.
- This affects both income recognition and cost classification.
Consult a CPA or tax lawyer especially when:
- Shifting from OSD to itemized deductions;
- Incorporating a brokerage company;
- Assessing whether MCIT may apply;
- Handling complex multi-tier commission structures or related-party transactions.

XI. Summary

Cost of services for real estate intermediaries in the Philippines is the bundle of direct costs necessary to earn service income: commissions paid to subagents, direct salaries and benefits, project-based advertising, direct transportation, and other direct costs.
For income tax purposes:
- It matters most under itemized deductions and for corporations subject to MCIT.
- It does not affect the base for VAT or percentage tax, which are computed on gross receipts.
Proper classification, substantiation, and documentation are essential to ensure that cost of services is recognized and allowed as a deduction.
Real estate intermediaries should maintain good bookkeeping, separate direct and indirect costs, and seek professional advice when in doubt.

If you’d like, I can next help you draft a sample chart of accounts or create templates (Excel-style) for computing cost of services specifically tailored for a real estate brokerage setup.