As a reputable accounting firm in Nigeria, we recognize the significance of accurate taxable income calculation for businesses operating in the country. Under the Companies Income Tax (CIT) Act, determining taxable income involves making adjustments and deductions to a company’s accounting profits. It is crucial for Nigerian businesses to understand these adjustments and deductions to ensure compliance with the law and optimize their tax positions. In this article, we provide insights into the adjustments and deductions allowed under the CIT Act, shedding light on how businesses can navigate this essential aspect of taxation.
Adjustments to Accounting Profits:
To arrive at the taxable income, companies must make specific adjustments to their accounting profits. Some common adjustments include:
a. Capital Allowances: Capital allowances are deductions granted for the depreciation of capital assets used in the business. Nigerian companies can claim capital allowances based on prescribed rates for different asset classes, such as machinery, equipment, buildings, and vehicles.
b. Non-Taxable Income: Certain types of income, such as dividends from Nigerian companies and interest on government securities, are non-taxable and should be excluded from the taxable income calculation.
c. Non-Deductible Expenses: Some expenses, although incurred in the course of business, are non-deductible for tax purposes. Examples include fines, penalties, entertainment expenses, and personal expenses of directors.
d. Tax-Free Income: Income derived from designated tax-free zones or pioneer industries, where tax incentives apply, may be exempted from the taxable income.
Deductions Allowed under the CIT Act:
Nigerian companies can claim various deductions to reduce their taxable income. Some of the significant deductions allowed include:
a. General Deduction: All companies are entitled to a general deduction equal to 20% of their assessable profits before any other deductions.
b. Research and Development (R&D) Expenses: Companies that incur qualifying R&D expenses can deduct such costs from their assessable profits to encourage innovation and technological advancement.
c. Donations: Companies are allowed to deduct donations made to recognized charitable organizations from their taxable income.
d. Export Expansion Grant (EEG): Export-oriented companies can claim a deduction based on the value of their export proceeds, as stipulated under the EEG scheme.
e. Interest on Borrowed Funds: Companies can claim a deduction for interest paid on borrowed funds used for business purposes.
Understanding the adjustments and deductions allowed under the CIT Act is essential for Nigerian businesses to accurately calculate their taxable income. By making appropriate adjustments to their accounting profits and claiming eligible deductions, companies can optimize their tax positions while ensuring compliance with tax laws.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.