Most businesses lose a lot of money by paying excess taxes without knowing which tax deductions they are liable to be exempted by the Kenya Revenue Authority (KRA). These tax deductions help you save money and optimize your financial resources. This article will highlight what expenses are deductible, how to ensure compliance, and some strategies to maximize deductions.
Understanding Tax Deductions
Tax deductions are expenses that businesses can subtract from their total income, reducing the amount of taxable income. You can significantly lower your tax liability by identifying and claiming eligible deductions, leaving more capital to invest in your business’s growth.
10 Common Business Tax Deductions
- Professional Services
Payments to professionals who provide services related to your business are typically deductible. This category includes fees for:
- Legal Services: Hiring lawyers for business-related matters.
- Accounting Services: Fees paid to CPAs or accounting firms.
- Consulting Services: Costs associated with hiring consultants for business advice.
Maximizing the Deduction: Keep records of all invoices and contracts with service providers. Ensure that services are directly related to your business operations.
- Business Travel Expenses
Business-related travel expenses can add up quickly but also yield substantial tax deductions. These expenses typically include:
- Airfare: Costs associated with flights for business trips.
- Lodging: Expenses for hotels or accommodations during your travels.
- Meals and Entertainment: Deductible meals and entertainment expenses while on business trips or entertaining clients.
Maximizing the Deduction: Keep thorough records, including receipts and details of business meetings and purposes for travel. Follow KRA guidelines for documenting expenses and distinguishing between personal and business travel.
- Interest and Loan Payments
Interest on loans or credit for business purposes can be a valuable deduction. These include:
- Interest on Business Loans: Deductible interest on loans to finance business operations or purchases.
- Mortgage Interest: If you own property used for business purposes, you may deduct the mortgage interest.
Maximizing the Deduction: Keep records of loan agreements and payments, ensuring they are adequately allocated to business expenses. Differentiate between personal and business loans.
- Capital Allowances
Depreciation allows you to recover the cost of certain assets over time. This deduction covers items such as:
- Equipment: Machinery, computers, and other equipment used in your business.
- Vehicles: Cars, trucks, or vans used for business purposes.
- Property: Commercial real estate and improvements made to it.
Maximizing the Deduction: Use the new 2023 Financial Act changes (effective 1 January 2024) to limit the deductible interest on expenses to 30% of the organization’s organization’s earnings before interest tax, depreciation, and amortization (EBITDA). Maintain records of asset purchase prices and depreciation schedules.
- Investment Deductions
You can be eligible for the tax deduction if you use your home or part of it as an office. These scenarios include:
- Wear and Tear: Costs related to repairs or maintenance of assets
- Industrial Building Allowance
- Commercial Building Allowance
- Balancing Charge
Maximizing the Deduction: Ensure strict adherence to KRA guidelines for claiming a home office deduction. Maintain detailed records and accurately calculate the square footage dedicated to your home office.
- Operating Expenses
Operating expenses are usually the everyday or recurring expenses that the business incurs. These expenses could include:
- Rent: The cost of renting office space, storefronts, or manufacturing facilities.
- Utilities: Payments for electricity, gas, water, and internet services.
- Employee Salaries and Wages: Money paid to employees, including salaries, wages, bonuses, and commissions.
- Office Supplies: Expenses for office essentials like paper, ink, pens, and other supplies.
Maximizing the Deduction: Keep detailed records of these expenses and ensure they are directly related to your business operations. Look for special rules and limitations, especially for home office deductions.
- Advertising and Marketing
Expenses related to promoting your business are deductible. These include costs for:
- Advertising Campaigns: Expenses for print, online, or broadcast advertising.
- Marketing Materials: Costs for creating brochures, business cards, and promotional materials.
- Website Development: Expenses associated with building and maintaining your business website.
Maximizing the Deduction: Track all advertising and marketing expenses and document their direct relation to your business.
- Healthcare Expenses
If your business provides healthcare benefits to employees, these costs are deductible. Small businesses may also qualify for a tax credit related to healthcare expenses. Deductible healthcare expenses include:
- Health Insurance Premiums: Costs for providing health insurance to employees.
- Medical Reimbursements: Payments made to employees for medical expenses.
Maximizing the Deduction: Consult with a tax professional to ensure compliance with healthcare-related tax regulations and explore potential tax credits.
- Bad Debts
Sometimes, clients can take products or services through debt and default to pay. You can deduct these unpaid debts as bad debt expenses. To be exempted, you need to show the following:
- The amount was previously included in your income.
- You made reasonable efforts to collect it.
- The debt is considered worthless.
Maximizing the Deduction: Maintain records of all attempts to collect the debt, including communication and collection efforts.
- Charitable Contributions
Donations made to qualified charitable organizations can be deducted, but specific rules and limitations must be considered. Expected deductible contributions include:
- Cash Donations: Contributions in cash, checks, or electronic payments.
- Property Donations: Donating property, such as inventory or equipment, to a qualified charity.
- Mileage: Deducting the mileage associated with volunteering for a charitable organization.
Maximizing the Deduction: Keep detailed records of all charitable contributions, including receipts from philanthropic organizations and documentation of property donations.
These tax deductions can improve your financial situation and safeguard your company from KRA scrutiny. Remember that it’s critical to maintain proper financial records and consult an expert accounting or tax consultancy agency. Staying updated on KRA regulations and tax laws will also help minimize your tax liability.