Can business expenses be claimed against company income tax?
Yes, business expenses can be claimed against your Company Income Tax (CIT) in 2026, but only if they meet specific legal criteria. Under the Nigeria Tax Act 2025, the government has tightened the rules on what qualifies to ensure businesses don't "inflate" costs to avoid tax.
1. The Golden Rule: WERN
To be deductible, an expense must pass the WERN test. It must be:
- Wholly incurred for the business.
- Exclusively for the purpose of the business.
- Reasonably priced (market value).
- Necessarily incurred to generate the taxable profit.
If an expense is partly for business and partly personal (like a car used for both), the tax office will prorate the deduction. If the non-business use is less than 10%, they may allow the full claim.
2. What You CAN Claim (Allowable Expenses)
- Operating Costs: Salaries, wages, rent for office space, and utility bills.
- Repair & Maintenance: Costs to keep your machinery, buildings, or vehicles running.
- Interest on Loans: Interest paid on money borrowed for business operations (subject to a limit of 30% of EBITDA for connected-party loans).
- Bad Debts: Debts that have officially gone "bad" during the year, provided you can prove you tried to collect them.
- R&D: Expenses for research and development are now deductible up to 5% of your turnover.
- Capital Allowances: You cannot deduct the "depreciation" your accountant calculates. Instead, you claim Capital Allowances on assets like computers, vehicles, and buildings at government-fixed rates (usually 10% to 25% annually).
3. What You CANNOT Claim (Non-Allowable)
The 2025 Act introduced a few "deal-breakers" that will get an expense rejected:
- Unpaid VAT/Duties: Section 21(p) explicitly states that if you bought something that should have had VAT or Import Duty, but you didn't pay it, you cannot claim the cost of that item against your income tax.
- Fines & Penalties: Any money paid to the government for breaking the law (traffic tickets, environmental fines, or tax penalties) is not deductible.
- Capital Expenditure: You cannot deduct the full cost of a new ₦50m machine in one year. You must "capitalise" it and claim it slowly via Capital Allowances.
- Personal Expenses: Anything that benefits a director or shareholder personally is disallowed.
4. Summary of the Tax Calculation Flow
To get to your "Taxable Profit" (the amount you actually pay 30% on), you follow this path:
| Step | Item | Action |
|---|---|---|
| 1 | Accounting Profit | Start with the profit on your P&L. |
| 2 | Add Back | Add back Non-Allowable expenses (like Depreciation or Penalties). |
| 3 | Deduct | Subtract Allowable Expenses and Capital Allowances. |
| 4 | Taxable Profit | Multiply this by 30% (if turnover > ₦100m). |
Important for 2026: The Exchange Rate Rule
If you have expenses in USD or Euros, you can only deduct them based on the official CBN exchange rate on the day of the transaction. If you bought Forex at a higher parallel market rate, the "extra" cost is not tax-deductible.