Business Expenses

Meaning, Tax Implication, & Practical Examples

These are expenses incurred in the ordinary course of a business. They are expenses a company incurs in running the day to day business activities. These expenses are deducted from the gross profit in arriving at operating profit before interest and tax in a company’s statement of profit or loss. However, it is essential that business expenses are tracked and recorded timely for strategic decision making and to minimise tax liability.

Business Expense and Tax Deductibility

Many business expenses are tax allowable deductions. They are recorded as operating expenses in the statement of profit or loss and must be well documented for audit and tax purposes. However, for an expense to qualify for tax deductibility:

It must be wholly and reasonably incurred in generating the revenue or income for the period
All records and relevant documents, including receipts and invoices attributable to the expenses must be accurately kept
Consistent with the Nigeria Tax Act 2025, any expense in which VAT was due but not deducted, or any imported item on which import duty or levy was not charged will not qualify for tax deductions.
All private expenses are not tax deductible.
Any expenses relating to penalties, fines, bribes, kickbacks, and political contributions are not allowable for tax deductions.

Categories of Business Expenses

Basically, business expenses can be categorized into direct costs, indirect costs, and interest costs.

Direct expenses

These are costs that are directly attributable to producing a product or service. Direct costs vary in proportion to production volume. This means that the higher the unit produced, the higher the direct costs that will be incurred. Examples include direct materials and components, direct labour, manufacturing supplies, etc. The direct costs are deducted from the revenue in arriving at gross profit.

Indirect Expenses

These are overheads incurred in running the business activities. Indirect costs are not directly related to producing a product or service. Examples include office or factory rent, salaries, marketing and advertising, depreciation, utilities, etc. Operating costs are usually deducted from the gross profit in the determination of operating profit before interest and tax.

Interest Costs

These are costs arising from debt, loans, borrowing, or financing activities. Examples include interest on bank loan and overdraft, interest on lease, interest on debt or borrowing.

Common Examples of Business Expenses

The following are some of the examples of business expense:

Wages and Salaries
Rent
Utilities
Marketing & Advertising
Staff Training
Meals & Entertainment
Insurance
Bank Charges
Supplies
Maintenance and Repairs
Depreciation
Professional Fee
Dues and Subscriptions
Gifts & Donations

Let’s explore each line item in detail:

Wages and Salaries

These are payments to workers, employees, and other staff during the month under consideration, for their effort to ensure business continuity. They represent the compensation paid to workers or staff for the services rendered to a company or employer. Generally, wages and salaries account for significant amount of operating expenses. Wages differ from salaries and their key difference are stated below:

Difference Between Wages and Salaries

The key differences between wages and salaries can be explained as follows:

Basis of Payment: Wages are paid hourly, daily, weekly, or piece-rate. On the flip side, salaries are paid monthly
Stability: Wages payment is less stable and it fluctuates, depending on the number of hours worked. Salaries are more stable and based on fixed payment structure.
Overtime Pay: Wages are eligible for overtime pay. Salaries on the other hand, may or may be eligible depending on the organizational policy.
Job Type: Wages are suitable for manual, casual, skilled, and unskilled labour. Salaries are mostly appropriate for professionals and administrative workers.
Fluctuation: Wages paid to workers vary or fluctuate depending on the number of hours worked or units produced. Whereas the salaries paid to workers or employees are fixed in nature i.e. it does not fluctuate.
Accounting Classification: In financial accounting, wages are classified as cost of sales as a deduction from revenue in arriving at gross profit, if it relates to production. Whereas salaries are generally classified under operating expenses in determining operating profit before interest and tax. In addition, for the purpose of cost accounting, direct wages are regarded as prime cost of production, while salaries are treated as factory overheads or administrative expenses.

Rent

This represents the consideration paid to a landlord or property owner by a tenant for the use of an asset, including land, building, or property for a specified period. The consideration or fixed periodic payment gives the tenant the right to use or occupy the property. Generally, rent is paid monthly, biannually, or annually, depending on the agreement between the parties (i.e. landlord and tenant).

Key Characteristics of a Rent

Contract Based: It is governed by a lease or rental agreement. The contractual agreement will expressly state the responsibilities of both parties on the property.
Ownership: The tenant does not own the property, only has the right of usage.
Frequency of Payment: Rent is paid periodically, e.g. monthly, quarterly, biannually, yearly.
Payment: Rent is a fixed periodic payment or can be reviewed depending on the contractual agreement.
Accounting Treatment: A tenant or lessee will treat rent as an expense, while the landlord will record as an income in the statement of profit or loss.

Types of Rent

Office Rent: This is paid for the use of office space or premises
Factory Rent: Amount paid for the use of factory building or warehouse
Residential Rent: Payment by an individual to a landlord to live in a house or apartment
Equipment Rent: This is paid for using tools, machinery, plant, or equipment own by a third party
Land Rent: Paid for the land used for agricultural or commercial purposes

Utilities

These are expenses incurred for basic essential services required for running a business, including electricity, water, gas, waste disposal, heating, cleaning, internet, telephone, etc.

Common Types of Utility Expenses

Electricity: To power computers, machines, and provide lightening
Water: Required for general cleaning activities and washing
Gas: For heating or powering certain equipment
Internet & Telephone: For communication and data usage
Waste Disposal: For trash removal and sanitation services

Marketing & Advertising

These are expenses incurred by a business for the purpose of promoting a product or service, attract new customers, generate revenue, and build brand awareness. These expenses are essential to ensure business growth, continuity, and market competitiveness.

Components of Marketing and Advertising Expenses

Digital Advertising: Social media ads (e.g. Facebook, Instagram, LinkedIn), Google ads, YouTube ads.
Traditional Advertising: Paid ads on TV, radio, newspapers, magazines, billboards.
Promotional Materials: For printing flyers, banners, brochures, branded merchandise.
Events & Sponsorships: For exhibitions, trade shows, product launches, brand sponsorships.
Marketing Staff Costs: Salaries of marketing department staff, or cost paid to consultants, or freelancers.
Content Creation: For graphic designs, copywriting, photography, video production, etc.
Website & SEO: For website design, website management, SEO tools, email marketing, blog content, etc.
Public Relations: Influencer partnerships, media outreach, press releases.

Staff Training

This refers to the expenses incurred by a business to enhance employees’ skills, knowledge, and performance through formal or informal learning programs. It is designed primarily to maximize or boost business productivity, efficiency, and ensure employee satisfaction.

Components of Staff Training Costs

In practice, training costs may include:

External Training Fees: These are fees paid to training organizations, consultants, or online courses
In-house Training Expenses: These are expenses incurred for venue setup, training materials, or meals.
Travel & Accommodation: Offsite training expenses incurred on transport, lodging, and meals.
Software & Tools: For e-learning platforms, licenses, etc.
Certifications & Exams: Payment for registration, tuition, and professional exams such as ICAN, ANAN, ACCA, CIMA, etc.

Meals & Entertainment

These are expenses incurred by a business on food, drinks, and business related recreational activities, including client meetings, staff events, or networking activities. It should be noted that not all meals and entertainment are allowed for tax deductions. For this purpose, good record keeping and documentation should be maintained. Auditors may want to know who, why, when, how much, and the approval.

Components of Meals & Entertainment

Client Meals: Lunch or dinner meetings with clients or prospects
Staff Meals: Staff lunch, meals during overtime, staff meetings, or training sessions
Business Events: Company retreats, end of the year party, product launch events, appreciation parties
Refreshments: Snacks, tea, or coffee for meetings
Entertainment Activities: Tickets for sporting events, shows, concerts for clients or business.

Important Notice for Tax and Audit Purposes

Meals and entertainment must be business-related to qualify for tax deductions
Personal and extravagant spending is not allowed as business expense
The expenses incurred must be well documented. The receipts, purpose, and list of attendees should be provided for audit and tax purposes.

Insurance

This relates to premium paid by a business to an insurer for protection against specific risk or financial losses. It indemnifies the business against unexpected future events arising from fire, accidents, theft, or liability claims.

Types of Business Insurance

Property Insurance: This covers loss or damage to buildings, equipment, inventory
Health Insurance: Medical coverage for employees
Life Insurance: Provides benefits to beneficiaries upon an employee’s death
Liability Insurance: Covers legal claims for injury or damage caused by the business to a third party
Professional Indemnity: This protects against claims of professional negligence

Bank Charges

These are expenses arising from financial transactions with banks. They are fees and commissions deducted by a bank from the account of a business for using its financial services. Bank charges must be reconciled regularly during bank reconciliations to ensure that bank statement and cashbook align.

Common Types of Bank Charges

Account Maintenance Fees: Monthly or annual fee for running the account
Card Fees: Annual debit/ credit card maintenance charges
Transaction Fees: Charges for transfers, withdrawals, deposits, or cheque clearing
ATM Fees: Charges paid for using ATMs, especially from other banks
Loan Processing Fees: Cost incurred for setting up or managing loans
Foreign Exchange Fees: Charges incurred when conducting international transactions
SMS/ Alert Charges: Charges for transaction alerts via SMS or email

Supplies

These are consumable items used by a business in running the daily business operations. Generally, supplies are not required for sales but used in the day to day business activities. Examples include:

Office Supplies such as paper, pens, files, printer ink, envelopes
Cleaning Supplies, including soap, detergent, disinfectants, mops, brooms, buckets
Production Supplies like lubricants, gloves, rags
Canteen Supplies, including cups, spoons, disposable plates, tea, sugar.

Maintenance and Repairs

These are expenses incurred in ensuring that assets such as buildings, equipment, machinery, and vehicles are in good working condition. These expenses help in ensuring smooth business operations and extend the economic useful life of assets without materially enhancing their value or capacity. Examples include:

Building Maintenance e.g. painting, plumbing repairs, AC servicing, lighting fixes
Equipment Servicing, including generator servicing, fixing production machinery, calibrating tools
Vehicle Repairs, such as servicing, tyre replacement, brake repairs for company vehicles
IT Maintenance e.g. updating software, fixing computers, replacing parts.

Depreciation

This represents a reduction in the value of an asset over a given period arising from wear and tear, usage, or obsolescence. It is a systematic allocation of the cost of a tangible asset, including building, motor vehicle, equipment, etc over its economic useful life, using straight-line, reducing balance, or units of production methods. Depreciation is non-cash operating expense and reduces the book value of the non-current asset in the statement of financial position.

Professional Fee

This represents the payment made to an external expert or professional, including accountant, lawyer, IT specialist, engineer, architect, etc. for the services rendered to the business. The fee is a compensation to the professionals for their time, knowledge, expertise, and value they provided to the business. Professional fee should be properly documented to ensure compliance, transparency, and for tax purposes.

Dues and Subscriptions

These are fees paid by a business to professional bodies, industry associations, or publications to validate memberships, access resources, or receive services. Examples of due and subscription include:

Professional Memberships: ICAN, ACCA, ANAN, NSE, NBA annual membership fees
Industry Associations: Clubs, business chamber memberships, trade groups, regulatory bodies
Publication Subscriptions: Business journals, magazines, online news sites
Software Subscriptions: Accounting software (e.g., QuickBooks, Sage), research tools
Online Platforms: Training platforms such as Coursera, Udemy, LinkedIn Learning

Gifts & Donations

These are expenses incurred by a business for voluntary transfer of money or property without expecting anything of value in return. Usually, gifts and donations are given to employees, clients, communities, charities, or nonprofit organisations for the purpose of building goodwill, support social causes, or enhance relationships. Examples of gifts and donations include:

Employee giftsg. birthday gifts, retirement tokens, service awards
Corporate gifts such as hampers, branded souvenirs, or end-of-year gifts for clients or employees
Charitable donations, including contributions to schools, NGOs, religious bodies
Community Support such as scholarships, donations to local projects, disaster relief funds.

Important Notice for Tax and Audit Purposes

The amount must be reasonable and well documented
Donations must be made to approved charitable organizations or bodies for tax purposes
Gifts to individuals, including employees, clients are not allowable tax deduction

At Greena, we pride ourselves with highly experienced and committed professionals willing and ready to collaborate with businesses to create value

Business Expenses