What Are Allowable Deductions?

Think of your business income as a big pot of soup 🍲. Tax authorities want to tax the meat (your profit), not the water and spices (your expenses).

Allowable deductions are those legitimate business expenses that you’re permitted to remove before tax is calculated.

Formula: Taxable Profit = Total Income – Allowable Deductions

Everyday Examples for a Small Business

Imagine you run a fashion design shop in Lagos. In one month:

• Total income (sales): ₦800,000

• Expenses:

  • Shop rent: ₦100,000

  • Tailors’ salaries: ₦200,000

  • Generator fuel: ₦50,000

  • Fabric & accessories: ₦250,000

  • Marketing (Instagram ads & flyers): ₦30,000

Without deductions:
Tax authorities see ₦800,000 and may tax it all.

With allowable deductions:
₦800,000 – ₦630,000 (expenses) = ₦170,000 profit.
You’ll only be taxed on ₦170,000, not ₦800,000.

That’s a huge difference.

What Expenses Are Allowable?

The Nigerian tax law (CITA & PIT) recognizes certain business expenses as deductible:

• Business Rent – The cost of renting your shop or office.
• Salaries & Wages – Payments to employees or contractors.
• Utilities & Fuel – Power bills, generator diesel, data subscription.
• Raw Materials & Supplies – Goods you buy to produce or resell.
• Marketing & Advertising – Flyers, social media ads, billboards.
• Transport & Logistics – Delivery costs, fuel for business trips.
• Professional Fees – Lawyer, accountant, or consultant fees.
• Stationery & Office Items – Printers, pens, paper, etc.

Not everything qualifies. Personal expenses like your birthday party, school fees for your children, or aso-ebi for a wedding are not allowable deductions.

Why This Matters for Small Businesses

1. You Pay Fair, Not Excessive Tax

If you make ₦2,000,000 in sales but spend ₦1,600,000 on running costs, your profit is only ₦400,000. Without allowable deductions, you risk being taxed on ₦2,000,000.

👉 Example:

• Without deductions: Tax = ₦400,000 (20% of ₦2,000,000)

• With deductions: Tax = ₦80,000 (20% of ₦400,000)
  💡 You just saved ₦320,000!

2. It Keeps Your Records Clean

Banks, investors, and even customers trust businesses that keep good financial records. If you ever want a loan, showing your expense deductions will make your business look credible.

3. It Prepares You for Growth

As your business grows, tax audits may come. Having receipts and records of allowable deductions will protect you from penalties and unnecessary disputes.

Common Mistakes Small Businesses Make

❌ Mixing personal expenses with business money.
👉 Example: You withdraw ₦100,000 from your business account to buy groceries. That’s not deductible.

❌ No receipts for expenses.
👉 If you claim ₦200,000 on generator fuel but have no receipts, FIRS may reject it.

❌ Using personal account for business.
👉 When everything is mixed up, it’s hard to prove what’s business-related.

How to Maximize Allowable Deductions

• Open a separate business account (don’t mix money).
• Keep receipts for every business expense.
• Issue invoices for every sale.
• Use simple record tools (Excel, notebooks, or free accounting apps).
• Review your records monthly to track profits and expenses.

Final Word

For small businesses in Nigeria, understanding allowable deductions is a survival hack. It helps you:

• Pay only what you owe in taxes.

• Build credibility with customers and banks.

• Keep more cash in your business to reinvest.

Remember this golden rule: If it’s necessary to run your business and you have proof, it’s probably deductible.