Allowable expenses are expenses that can reduce the taxable income (or profit) of an individual or business. Another name for an allowable expense is a tax-deductible (TD) expense. This type of expense lowers the amount of tax payable.
Tax payable is calculated by multiplying the tax rate by the taxable profit minus any tax credit(s). Taxable income (or profit) is the total income or profit subject to income tax. Accounting profit may differ from taxable profits because some expenses are not allowed in taxation. Therefore, accounting profit or profit before tax must be adjusted for tax purposes to arrive at the assessable profit. Thereafter, balancing adjustments, loss relief, and capital allowance will be recognised to determine the taxable profit.
Every jurisdiction has a defined list of tax-deductible expenses in place. The first step, therefore, is to check the relevant tax laws, regulations, and policies to identify the allowable cost.
This article focuses on the allowable expenses for companies operating in Nigeria. Under the Companies Income Tax Act 2004 (as amended) companies can deduct expenses that are wholly, exclusively, necessarily, and reasonably incurred in generating those profits including;
- interest on loan
- rent, and premiums on land or building. Residential accommodation for the organisation’s employees has a limit of 100% of the basic pay of employees.
- salary, wages, or compensation;
- benefit or allowance provided for the senior staff and executives
- repair of premises, plant, machinery, fittings, implements, utensils, or articles
- bad, and doubtful debts that can be proven. All sums recovered on amounts previously written off or allowed as doubtful debts shall be treated as profits of the trade or business of that period;
- contribution to an approved pension, provident, or other retirement benefits fund;
- contribution other than a penalty made under the provisions of any enactment establishing a national provident fund or other retirement benefits scheme for employees throughout Nigeria;
- any expenses or liability that are wholly, exclusively, necessarily, and reasonably for such trade or business;
- research and development expenses;
- donations to approved bodies that are not capital expenditure. The maximum amount is ten percent (10%) of the total profits for that period before deduction.
- any other deduction as determined by the Minister of Finance by any rule.