Just as some expenses are properly deductible, others are not, regardless of how a business records them. Claiming a non-deductible expense, whether by error or by design, is one of the most common sources of disputes between businesses and the tax authority during audits and reviews. This article sets out categories that are typically disallowed and how to avoid disputes over them.
How it works
An expense is generally not deductible where it fails the "wholly, exclusively, necessarily and reasonably" test, or where the tax law specifically excludes it. Some categories are excluded by their nature, regardless of how carefully they are documented.
Categories commonly disallowed
- Capital expenditure claimed as a revenue expense. Costs of acquiring, improving or extending an asset are capital in nature and are not deductible in full in the year incurred; they are typically dealt with through capital allowances instead.
- Personal or domestic expenses run through the business, including personal travel, personal entertainment, and expenses for family members not employed by the business.
- Fines and penalties. Amounts paid as fines or penalties for breaking the law are generally not deductible, since allowing a deduction would effectively subsidise the wrongdoing.
- Provisions and general reserves that are not based on a specific, identifiable, quantifiable liability, as opposed to actual expenses incurred.
- Expenses not wholly, exclusively and necessarily incurred for the business, such as donations unrelated to the business or gifts without a clear business purpose.
- Unsubstantiated expenses — amounts claimed without invoices, receipts or other supporting evidence.
- Certain related-party payments that are not made on arm's-length terms, or that are not properly documented as genuine business transactions.
Why this matters to taxpayers
A disallowed expense does more than remove a single deduction. It increases assessable profit, which increases the tax due, and where the claim is found to be incorrect after filing, it can also trigger interest and penalties. Where a pattern of disallowed claims is identified, it can also increase the likelihood of a broader review of a business's records.
Tax implications
- Reassessment risk. If the NRS disallows an expense during a review, the business's tax liability for that period is recalculated upward, with interest typically applied from the original due date.
- Penalties. Published guidance under the Nigeria Tax Administration Act sets out penalties for underpayment arising from incorrect returns.
- Time and cost of disputes. Responding to a query or audit finding takes time and resources that a well-documented, correctly prepared return would avoid.
- Reputational considerations. Businesses seeking tax clearance certificates, government contracts or credit facilities may find unresolved tax disputes affect these processes.
Step by step: how to avoid disputes over deductions
- Apply the deductibility test consistently to every expense before it is recorded as a deduction.
- Classify capital and revenue expenditure correctly at the point of purchase, not at filing time.
- Keep personal and business expenses entirely separate.
- Document the business purpose of any expense that could otherwise appear ambiguous.
- Avoid claiming fines, penalties or clearly non-business costs as deductions.
- Base provisions on specific, quantifiable liabilities, not general estimates.
- Review related-party transactions to confirm they reflect genuine, arm's-length business arrangements.
- Have your computation reviewed before filing, particularly where deductions are significant or unusual.
Why engage a professional consulting firm
- Pre-filing review. A professional can review deductions before a return is filed, reducing the risk of a later dispute.
- Dispute response. Where a query is raised, a firm can help prepare a clear, evidence-based response.
- Consistency. An accountant can help ensure the same principles are applied across accounting periods.
- Independent judgement on borderline items, where a business owner may be inclined to interpret a rule in their own favour.
Why every business should comply
Filing accurate returns, with only properly deductible expenses claimed, reduces the likelihood of disputes, penalties and the time cost of responding to a tax authority review. It also supports the business's standing when applying for tax clearance certificates and other approvals that rely on a clean compliance history.
Tips to reduce dispute risk
- Maintain a clear expense policy internally, so staff know what is and is not claimable.
- Reconcile your accounts regularly, rather than only at year-end.
- Keep a capital asset register separate from your revenue expense records.
- Retain documentation for the full statutory retention period.
- Seek advice before claiming unusual or large deductions, rather than after a query is raised.
Relevant law
- Nigeria Tax Act, 2025 (deductibility and capital allowance provisions)
- Nigeria Tax Administration Act, 2025 (assessment, penalties and dispute procedures)
Frequently asked questions
Can a fine paid to a regulator be deducted as a business expense? Generally not. Fines and penalties for breaking the law are typically excluded from deduction.
What if an expense is business-related but I lost the receipt? Without supporting evidence, the claim may be disallowed if queried. Other forms of evidence, such as bank statements, may help but are not always sufficient on their own.
Are all provisions disallowed? Not all. Provisions based on a specific, quantifiable and identifiable liability may be treated differently from general or estimated reserves. This should be reviewed on a case-by-case basis.
What happens if the NRS disallows an expense after I have filed? Your assessable profit and tax liability for that period may be recalculated, potentially with interest and penalties applied.
How can I reduce the risk of a dispute? Apply the deductibility test consistently, document expenses properly, and have your computations reviewed before filing.
Where you need further assistance: You may contact US & CO. (Chartered Accountant), a professional tax consulting firm in Lagos, Nigeria. 📞 WhatsApp: 08056219998 📧 Email: info@usc.com.ng 🌐 Website: https://www.usc.com.ng
Footnote: This article is for general information only. It is not complete investment, tax or legal advice. Deductibility depends on the specific facts and current law. Readers should consult a qualified professional before making any investment or tax decision.
