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Tax Adjusted Profits

Refer to Profit & Loss Account and adjust expenses that are not authorized and deductible per the tax law. Format for computing Tax Adjusted profits Net Profit Add Non-allowable expenditure (i) (ii) (iii) (iv) Depreciation Expenditure not related to trading Loss on sale of Fixed Assets Repairs & restoration cost (a) Initial repairs to an asset where they are necessary to make the asset useable in the trade (b) Repairs of a capital nature Improvement to an asset Subscription & donation (a) Political donation (b) Non charitable gifts Charitable gifts which have satisfied all the conditions (see note 1) Entertainment and gifts (a) Entertainment of Customers (b) Gifts costing > 50 per recipient per annum The gift which is food, drink, tobacco or vouchers exchangeable for goods. (d) Other gifts not relating to trading (e) Private entertainment & gifts Legal & professional fees (a) Legal fees I c w acquisition of Fixed Asset (b) Fees arising I c w issuing of new share capital fines & penalties (d) Fees incurred I c w private tax advise Rent & Short lease Premium paid I c w initial granting of a short lease ( a short lease < 50 years) Bad Debts (a) General provision made for allowances for bad debts (b) Other non-trade debts written off e.g. W/off of loans to employees. Less allowable expenditure Capital Allowances on: (a) Plant & Machinery (WDA) (b) Industrial Building (IBA) Long Life Assets (WDA) Interest Payable on accrual basis provided it is incurred for trading purposes Premium paid on a short lease Profit on sale of a fixed assets Other Allowable items Patent royalty (on accrual basis and provided it is incurred for trade purposes) No adjustment if already deducted as expense in Page 1 of 4 X X X X X X X X X X X X X X X X X X X X X XXX




(viii) (ix)



(X) (X) (X) (X) (X) (X) (X) (X) (X)

(2) (3) (4) (5) (6)

computing Operating Profit. Tax Adjusted Profits

Additional Notes (i) Expenditure not incurred wholly and exclusively for trading purposes. 2 tests (a) The remoteness test It is too remote from the purpose of the trade. Expenditure is regarded as being too remote from trade when it is incurred in some capacity other than that of trade. For Example; a loan to an employee that has been written off is not allowable (b) Duality principle It has more than one purpose and one of them is not trading. (ii) (a) Repairs 2 circumstances Initial repairs to an asset are not deductible where they are necessary to make the asset For Example; repair work on a newly bought ship in order to make the ship seaworthy prior to using it is not allowable as it a capital expenditure rather than a revenue expenditure (Law Shipping case) (b) Initial repairs are allowable if an asset can be put into use before the repairs are carried out (the cinema case). (iii) Restoration cost (a) If the restoration cost /repairs is replacing like with like, for example, replacing a door with another similar door, it is a repairs and thus allowable as it is not adding value to the cost of the asset. (b) If the restoration cost /repairs is adding value to value of the asset, there is an improvement not hence not allowable. (iv) Subscription and donations (a) Trade and professional association subscriptions are allowable expenses. (b) Charitable donation 3 conditions to satisfy for the expenses to be deductible. These are; (1) It must be wholly and exclusively incurred for trading purposes like promoting the companys name. (2) It must be local and reasonable in size in relation to the company making the donation. (3) It must be made to an educational, religious, cultural, recreational and benevolent organization.

useable in the trade

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Exception If the donation is disallowed by reason of failing one or both of the first two tests above (but it is still made to a charity), then; Step 1 it is disallowed in computing schedule D1 profit Step 2 it is deducted from the total income when computing PCTCT as a charge on income. (c) Subscription and donation made to political parties are not allowable (d) Non-charitable gifts are not allowable (v) Entertainment and gifts (a) Entertainment employees. (b) Gifts to employees are allowable expenses (c) Gifts to customers 3 conditions to satisfy for deductible. These are; (1) They cost less than $ 50 per recipient p.a. (2) The gift is not food, drink, tobacco or vouchers exchangeable for goods. (3) The gift carries a capacious advertisement for the company making the gift. (vi) Legal and professional charges (a) If incurred in connection with trade are not related to capital items such as fees to collect trade debt or charges incurred in defending the title to Fixed assets, are allowable (b) Not allowable in the following circumstances (vii) Incurred in relation to capital items Fees incurred when acquiring new fixed assets Fees arising as a result of issuing new share capital expenditure is disallowed except entertainment relating to


The costs of registering patents is allowable on an accrual basis. (viii) Bad debts and provisions (a) Provisions such as general provisions against doubtful trading debts are notional expenses and as such are not deductible. (b) Bad debts:

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Writing off a trade debt and specific provisions against doubtful trading debts are allowable Increase or decrease in general provision

An increase is added back to profit A decrease is deducted (ix) (x) Non-allowable bad debts, for example loans to employees written off.

Interest payable Charges on income and gift aid

Interest paid on borrowing for trading purposes is allowable on an accrual basis These are deductible in computing tax adjusted profit but deductible form total profits chargeable to corporation tax. (xi) Car leasing for car costing more than $ 12,000.

The allowable portion is reduced to the amount given in the following formula: Annual rental Charge in P & L a/c * $ 12,000+ (Cost of car (when new) - $12,000) Cost of car (when new)

For example, R ltd enters into a car leasing contract for a motor car with an original cost of $30,000 paying $ 8,000 p.a in rental charges. (xii) Capital allowances

Capital allowances are allowable in lieu of depreciation and are deductible as if they were a trading expenses (xiii) Pre-trading expenditure Any pre-trading expenditure incurred in the 7 years before a company commences to start trading. It is deductible provided that it would have been allowable expenditure had trade started.

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