Nigeria Tax Act 2025: What Business Expenses Are Deductible?

Nigeria Tax Act 2025: What Business Expenses Are Deductible?

When calculating taxable profits, one of the most important questions every business owner asks is: what expenses can I deduct? The Nigeria Tax Act, 2025 provides a clear framework, ensuring businesses account only for legitimate expenses directly tied to generating income. This section of the law is crucial for businesses, accountants, and tax professionals because it determines how much profit is actually taxable after expenses are considered.

Deductible Expenses Explained

The Act recognizes that running a business involves costs, and many of these can rightfully reduce taxable income. For instance, interest on loans used to finance business activities is deductible, as are rent and premiums paid on premises or land used for business. Salaries, wages, and benefits given to employees also qualify, along with expenses on repairs and maintenance of buildings, machinery, or equipment.

Businesses may also deduct costs tied to defending ownership rights over assets, as well as contributions made to approved pension and retirement funds under the Pension Reform Act. If a company suffers damage to stock or inventory, those losses are deductible, provided the tax authority is satisfied.

The law also covers bad and doubtful debts. If debts become irrecoverable during a business period, they can be deducted, except for debts owed by related parties. Doubtful debts may be deducted as long as they are properly estimated under accounting standards and approved by the tax authority. Importantly, if a debt previously written off is later recovered, the recovery must be added back to taxable profits in the year of collection.

Another category of deductible expense is research and development (R&D) costs. This provision encourages innovation and investment in new processes or products by allowing businesses to write off R&D spending. Similarly, pre-incorporation expenses incurred within six years before the start of business operations can be deducted once operations begin, treating them as if they were incurred on day one.

The Act goes further to allow deductions for specific modern financial transactions. Dividends or mandatory distributions made by real estate investment companies approved by the Securities and Exchange Commission are deductible, as are compensating payments in regulated securities lending arrangements. On a social inclusion note, expenses for assistive devices and disability-related products such as hearing aids, wheelchairs, and braille materials are also deductible.

Safeguards Against Abuse

While the law provides wide latitude for deductions, it also includes safeguards. Debts from related parties are excluded from bad debt deductions. Recoveries on previously deducted debts must be brought back into taxable income. Furthermore, deductions for expenses in foreign currency are only allowed to the extent of their Naira equivalent, calculated at the official Central Bank of Nigeria exchange rate. This prevents businesses from manipulating foreign exchange rates to inflate deductions.

Why This Matters

This framework matters because it balances business interests with government revenue needs. On one hand, it ensures businesses are not unfairly taxed on gross revenue without considering genuine operating costs. On the other hand, it prevents manipulation by restricting questionable deductions and tying them to official oversight.

For businesses in Nigeria, this means that good recordkeeping is essential. Every deductible expense must be backed by documentation and, in some cases, tax authority approval. For tax professionals, understanding these rules is the key to helping clients maximize allowable deductions while staying compliant.

At Bahas Books, our goal is to simplify complex tax laws into practical knowledge for entrepreneurs, accountants, and professionals. Knowing what can—and cannot—be deducted helps businesses plan better, reduce risk, and achieve compliance with confidence.

👉 For more insights on taxation and compliance, visit bahasbooks.com.

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