11/07/2014
2014-07-11
What Can You Deduct as a Business Expense?
In his days as a lawyer traveling the Eighth Judicial Circuit, Abraham Lincoln once asked an adversary in court, “How many legs does a sheep have?” The man replied, “Four, of course,” Lincoln went on to ask “And if you were to call a tail a leg, how many legs then?” The man replied, “Well I suppose then you’d have to say five.” Lincoln smiled and responded, “No. The answer is still 4. Calling a tail a leg does not make it so.”
We are often asked by our clients what constitutes a deductible business expense? The answer the Kenya Revenue Agency has provided is quite simple: a deductible business expense is any reasonable current expense (cost) you paid or will have to pay to earn business income (revenue).
Personal expenses are specifically excluded, which brings us back to President Lincoln’s parable: calling a personal expense a business expense does not make it so. The KRA has an army of auditors who exist for the sole purpose of disallowing bogus business expenses.
Commonly Audited Personal Expenses
1. Non business travel expense. Any trip that is predominantly taken for non-business purposes is disallowed. If a trip is for a business related conference or meeting the business portion of the trip would include only airfare and accommodations for the duration of the conference or meeting.
2. Shareholder / Employee medical expenses. Unless you have set up a private health service plan in your business (i.e. a formal health insurance arrangement funded by the corporation), health expenses paid for shareholders or employees aren’t deductible.
3. Non business meals. Unless a meal is for the purpose of earning business income, such as taking a client out for dinner, the cost of the meal is not deductible. This means that going for lunch by yourself is not deductible.
Expenses Deductible for Business Purposes
Now that we’ve covered the negative examples, here’s a comprehensive list of the types of expenses that are deductible for business purposes:
Advertising
Bad debts
Business start-up costs
Business taxes, fees, licences, dues, memberships, and subscriptions
Capital cost allowance
Delivery, freight, and express
Fuel costs
Insurance
Interest
Legal, accounting, and other professional fees
Maintenance and repairs
Management and administration fees
Meals and entertainment
Motor vehicle expenses
Office expenses
Prepaid expenses
Property taxes
Rent
Salaries, wages, and benefits
Supplies
Telephone and utilities
Travel
This is a long list, and if you were to review all expenses, you’ll see that properly accounting for your business expenses is, at times, difficult. But not to worry, that’s our job.
