If your business pays tax on profit, every deductible expense lowers the bill. Claiming all that you are entitled to is legitimate; claiming what you are not entitled to is expensive. Here is how to tell the difference and what proof you need.

The test

An expense is deductible when it was wholly and exclusively incurred in the production of your income, and it is not specifically disallowed by the law. In plain terms: the money was spent for the business, not for you or your family, and the expense is a cost of running the business rather than a purchase of an asset.

Typical deductible expenses

  • Cost of goods sold: stock bought for resale, materials, packaging
  • Rent and utilities for business premises
  • Salaries and wages, with the employer's NSSF and Housing Levy contributions
  • Transport and delivery, fuel and vehicle running costs for business use
  • Advertising and marketing
  • Professional fees, such as accountants and lawyers
  • Insurance of business assets
  • Interest on business loans; see borrowing for your business
  • Repairs and maintenance
  • Bad debts properly written off
  • Licences and permits
  • Bank charges and M-Pesa transaction fees

What is not deductible

  • Personal and household expenses, even when paid from the business account
  • Drawings by the owner of a sole trader business
  • Capital items, such as buying equipment, which earn capital allowances instead of an immediate deduction; see fixed assets and capital allowances
  • Fines and penalties
  • Entertainment and similar expenses, which are limited or disallowed
  • Loan principal repayments

The invoice rule

Under the eTIMS rules, a business needs a valid electronic tax invoice to support an expense, and an invoice that does not show your PIN may not support the claim. That means asking suppliers for an eTIMS invoice every time you buy, even for small amounts. See eTIMS e-invoicing explained. Without a proper invoice, the deduction may be refused and your taxable profit goes up.

A worked example

Sales are KES 3,000,000. Cost of goods is KES 1,600,000, rent KES 240,000, wages KES 420,000 and transport and other costs KES 180,000. The total deductible expenses are KES 2,440,000, giving a profit of KES 560,000. If KES 200,000 of the claimed costs has no valid invoice and is disallowed, the profit becomes KES 760,000 and the tax rises. The tax records checklist and document log shows how to keep proof ready.

Record as you go

Write each expense in a cashbook and file the invoice the same day. The free simple cashbook and the expense tracker with VAT do the sorting for you, and VAT-registered businesses can claim input VAT too; see how to file a VAT return.

Mixed-use costs

If a cost has both business and private use, such as a phone or a vehicle, claim only the business share, on a reasonable basis that you can explain.

Compare the tax result

Run your profit through the sole trader versus company calculator to see the effect, and read how to keep business records for KRA for retention.

Deduction rules are set by the Income Tax Act. Confirm unusual items with KRA or a registered tax agent.

Common questions

Are personal expenses deductible? No. Only costs incurred wholly and exclusively to earn the business income can be deducted, so keep personal spending out of the business records.

Do I need an eTIMS invoice for every expense? KRA expects supplier invoices to come through the electronic system for you to deduct them, so ask suppliers for eTIMS invoices and keep them with the payment proof.

Can I deduct the full cost of equipment? No. Equipment is a capital cost that earns capital allowances over several years rather than a one-off deduction.