Allowable and not-allowable company expenses for tax purposes

Expenses are the daily costs incurred in running and maintaining a business. In an accounting sense, the term means costs involved in generating income or profit. All operating, overhead and production costs incurred in producing gross revenue, money spent by a firm to continue her ongoing operations; money spent or costs incurred that are deductible and reduce your taxable income are expenses.

Expenses are the opposite of incomes. Costs that are not deductible are called “capital expenditures” and they must be depreciated or amortised instead. Expenses have been divided into four categories namely:

(a) trade or business expenses,

(b) expenses in connection with production of income, in connection with management, or maintenance of property held for production of income,

(c) expenses in connection with the determination, collection, or refund of any tax, and

(d) personal, family, or living expenses. Expenses in the fourth category are not deductible, except in a few cases (medical expenses, charitable contributions, etc.) in which they are specifically allowed by law.

Expenses are to be distinguished from “capital expenditure.” Capital expenditure and expenditure incurred in producing exempt income are not tax deductible. Expenses constitute the third element of cost after materials and labour. Expenses can be classified as direct or indirect expenses. Examples of expenses are insurance, rates, rent, taxation, royalties paid for licence to produce product, electricity, freight, sales commission, telephone, depreciation, etc.

Expenses incurred in forming a company

Before, discussing the expenses that are allowable or not allowable for tax purposes, it is appropriate to examine the expenses incurred in forming a company, some of which may be allowed for tax purposes. They are generally referred to as “formation,” initial or preliminary expenses incurred in connection with the creation of a company.

Initial incorporation expenses

The actual cost of company formation is not allowable against profits as it is deemed to be a ‘capital’ rather than a ‘revenue’ expense.

Expenses such as stamp duty on authorised capital, cost of filing fees, legal expenses, etc, relating to initial incorporation or share increases are not tax deductible. They are capital expenses in that they are not related to any particular year’s profits. Rather, they are once and for all expenses with enduring benefits to the company.

Such expenses are:

· Stamp duty paid on the Memorandum and Articles of Association;

· Registration Fees;

· Underwriting commission;

· “Brokerage” paid to bankers, stockbrokers, etc. for introducing applicants for shares or debentures;

· Printing, advertising, postage, etc., incidental to the formation of the company, the issue of prospectus, the issue of share, etc.; and

Other expenses of similar nature are:

· Commission paid in respect of shares or debentures, and

· Discount allowed in respect of debentures.

Expenses incurred in the formation of a company and the issue of its capital absorb some of the capital. Preliminary expenses are, therefore, commonly treated as “fictitious assets” and are written off against profits in instalments spread over the first few years of trading. They are clearly expenses of capital in nature and they are not allowed for tax purposes. FIRS files such details of expenses in a Permanent Note Jacket, popularly referred to as PNJ.

TEJU TAX