Nigeria Tax Act 2025: Expenses That Cannot Be Deducted

Nigeria Tax Act 2025: Expenses That Cannot Be Deducted

When calculating taxable profits, businesses often try to maximize deductions to reduce their tax liabilities. However, the Nigeria Tax Act, 2025 makes it clear that not every cost is deductible. While the law recognizes legitimate business expenses such as salaries, pensions, and repairs, it also draws strict boundaries to prevent abuse and safeguard Nigeria’s tax base.

What Cannot Be Deducted

The Act prohibits deductions for capital repayments or withdrawals, as these are returns of investment, not expenses tied to generating income. Expenditures of a capital nature—such as acquiring or improving fixed assets—are similarly excluded. Personal or domestic expenses and any spending on assets not used in the business are also disallowed.

Recoverable sums under insurance or indemnity contracts cannot be deducted, since they do not represent net losses. Taxes on income or profits, whether imposed in Nigeria or abroad, are explicitly non-deductible. Pension or retirement contributions to funds not approved under the Pension Reform Act are excluded as well. Depreciation or impairment of fixed assets, along with unrealised foreign exchange losses, are also off the list, since the Act uses its own schedules and official exchange rates for such adjustments.

Businesses are also prevented from deducting reserves of profit that are restricted under the Act, payments to connected parties that violate Nigeria’s Transfer Pricing Regulations, or expenses tied to exempt income. Fines and penalties imposed under law cannot be deducted, as they are punitive rather than operational costs.

The law goes further to restrict deductions in the context of securities lending transactions. Compensating payments treated as dividends or interest cannot be deducted, whether made by borrowers, lenders, or approved agents. Additionally, any expense linked to Value Added Tax that was due but not charged, or import duties and levies that were not paid on imported items, is disqualified from deduction.

Why These Restrictions Matter

These exclusions are designed to preserve fairness in the tax system. Allowing businesses to deduct capital repayments, penalties, or taxes would erode government revenue and create loopholes. Similarly, excluding unapproved pension schemes, improper transfer pricing arrangements, and uncollected VAT ensures compliance with wider financial regulations.

In practice, this means companies must carefully separate allowable business expenses from non-deductible ones when preparing accounts. Deduction claims must always be tied to costs that are wholly and exclusively incurred for generating taxable income. Anything outside this principle—whether capital, personal, or non-compliant—must remain outside the tax calculation.

Final Thoughts

The Nigeria Tax Act, 2025 strikes a balance between supporting businesses through legitimate deductions and protecting government revenue from erosion. For business owners, accountants, and tax professionals, this makes accurate recordkeeping and compliance more important than ever. Knowing what cannot be deducted is just as critical as knowing what can.

At Bahas Books, we break down these complex tax rules into practical knowledge so that you can run your business more effectively and avoid costly errors.

👉 For more insights on tax, compliance, and business strategy, visit bahasbooks.com.

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