A taxpayer is allowed to deduct expenses from his assessable income before calculating his tax liability. However, deductions from assessable income are restricted to only those costs incurred to generate the assessable income.
The Taxation Act stipulates that “for the purpose of determining the taxable income of any taxpayer, there shall be deducted from the assessable income of such taxpayer the amounts of any expenditure and losses, not being expenditure of a capital nature, wholly and exclusively, and necessarily incurred by the taxpayer for the purposes of his trade or in the production of the income”.
The key words are “wholly”, “exclusively” and “necessarily” and this means that only those expenses which are wholly, exclusively and necessarily incurred by the taxpayer for purposes of his business would be allowed. An expense can therefore be deducted from assessable income if it meets the requirements under the Taxation Act.
There are specific rules for certain expenditures to be deductible against assessable income, for instance travel expenses between work locations, professional subscriptions to a relevant professional body and donations not exceeding K5 million during year of assessment to approved charitable and non-profit organizations.
Other allowance deductions include repairs of a revenue nature, capital allowances, premiums, bad debts, provision for doubtful debts, pension contribution by employer, research expenditure, trading losses and initial business expenditure among others.
Annuity allowance or pension is an allowable deduction if paid to an employee who retired due to ill-health, infirmity or old age.
However, not all expenses are allowable deductions. There are other expenses which will be incurred by the business which will not be allowable for deduction. For instance, expenses incurred by the taxpayer to maintain himself and his family and other domestic or private expenses are not allowable.
Expenses which are not “wholly”, “exclusively” and “necessarily” incurred by the taxpayer for the purposes of his business are not allowable deductions and they would be added back to taxable income.
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