Business Income and Capital Allowances
Income Tax
Business Income and Capital Allowances
Syllabus tag: KASNEB CPA | Advanced Level | CA35S1 Advanced Taxation
1. Principles of business income taxation
Under the ITA, business income (profits of a trade, profession, or vocation) is taxed after deducting allowable expenses and capital allowances. The starting point is accounting profit; adjustments are then made to arrive at taxable income.
Allowable deductions must be: wholly and exclusively incurred in the production of income; not capital in nature; not expressly disallowed. Allowable expenses include: cost of sales, employee costs, rent of business premises, repairs and maintenance (revenue nature), interest on business borrowings, and bad debts written off (specific provision).
Disallowed expenses include: private and domestic expenditure, depreciation (replaced by capital allowances), fines and penalties, capital expenditure, and provisions that are not specific.
2. Capital allowances — the main categories
Since depreciation is not deductible for tax, Kenya allows capital allowances as a substitute:
Investment deduction (ID): for industrial buildings, hotels, hospitals, and commercial buildings used for specified purposes. Rate: 100% in the year of first use for qualifying industrial buildings. For commercial buildings: 10% per annum straight-line.
Wear and tear allowances (WTA): for machinery and plant, calculated on a reducing balance basis using prescribed rates:
Class 1 (computers, copiers, data handling) — 37.5% p.a.
Class 2 (automobiles, aircraft, construction) — 25.0% p.a.
Class 3 (other plant and machinery) — 12.5% p.a.
Farm works deduction: for works on a farm — 33⅓% per annum.
3. Computing wear and tear allowance
Opening TWDV (tax written-down value) X
Add: additions during the year X
Less: disposal proceeds (X)
Pool balance before allowance X
Less: WTA at prescribed rate (X)
Closing TWDV carried forward X
Where a pool shows a negative balance (excess of proceeds over TWDV), a balancing charge arises — a taxable amount added back to income.
4. Business losses
A trading loss incurred in any year of income may be carried forward and set off against future profits from the same source for an unlimited period. Losses cannot be carried back or surrendered to another company in a group under Kenya law.
5. Adjustment of profits — worked example
Net profit per accounts X
Add back disallowed items:
Depreciation X
Fines and penalties X
General provisions X
Private element of expenses X
Less allowable items not in accounts:
Capital allowances (X)
Specific bad debts (X)
Adjusted taxable profit X