A company’s accounts show a profit of ₦12.4 million. The tax authority taxes a different figure. Depreciation is added back, a traffic fine is added back, a loan written off to a sister company is added back, and a donation is cut to a limit.
The result, adjusted profit, is the starting point of every company tax computation, and most of the marks in a typical Advanced Taxation question go to getting each item right.
This topic covers why accounting profit is adjusted, the expenses allowed and disallowed under CITA (up to 2025) and the NTA 2025 (from 2026), foreign currency expenses, bad and doubtful debts, donations, research and development, waivers, expenses of earning exempt income, the 30% EBITDA interest cap, connected persons, and tax borne for others. The previous topic covered basis periods. The next covers loss relief.
The November 2020 Pathfinder (Question 1) required the adjusted profit of a Nigerian subsidiary, but under CITA; where the NTA differs, our answer says so.
In 30 seconds
Adjusted profit = accounting profit + disallowable expenses + taxable income not credited − non-taxable income credited − allowable expenses not charged. Test: under the NTA 2025 an expense is allowed if wholly and exclusively incurred to produce the income (s. 20); CITA also asked for necessarily and reasonably.
Always disallowed (s. 21):
- capital expenditure
- depreciation and impairment
- unrealised exchange differences
- reserves and provisions out of profit
- taxes on profit
- fines and penalties
- tax borne for others
- payments to connected persons that break transfer pricing rules
- expenses of earning exempt income
- expenses on which VAT or import duty was due but not paid
Donations to approved bodies: up to 10% of profit before tax (s. 163).
Research and development: up to 5% of turnover (s. 164). Interest to connected persons is capped at 30% of EBITDA, with the excess carried forward up to five years.
Key terms in plain English
| Term | What it means |
|---|---|
| Adjusted profit | Accounting profit corrected for tax: the figure before capital allowances and loss relief |
| Allowable expense | An expense that can be deducted when computing taxable profit |
| Disallowable expense | An expense charged in the accounts that must be added back |
| Connected person | A person under common control, ownership or management, or a related party under the transfer pricing regulations |
| EBITDA | Earnings before interest, taxes, depreciation and amortisation |
| Franked income | Dividend received after tax, not taxed again in the receiving company |
Syllabus check
This topic is in syllabus area B (taxation of companies and investment income, 35% of marks). It covers:
- allowable and disallowable expenditure;
- the changes made by the Finance Acts 2019 and 2020 and by the Nigeria Tax Act 2025;
- the procedure for computing adjusted and assessable profit.
CAMA 2020 and adjusted profit
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare financial statements that give a true and fair view | Accounting profit is the starting figure; adjustments follow |
| s. 426 and s. 427 | Dividends are paid only out of distributable profits | A dividend is an appropriation, not an expense, and is never deducted |
| s. 305 and s. 308 | Directors must act in good faith, with the care, diligence and skill of a reasonably prudent director | Directors must not claim expenses the law disallows |
The rules in more depth
Why accounting profit is adjusted
Tax uses accounts prepared under ordinary accounting rules, because separate tax accounts would duplicate work. But the accounts may omit taxable income, include non-taxable income (franked dividends, profit on sale of assets), omit allowable expenses or include disallowable ones. The adjustment format is:
| Step | Treatment |
|---|---|
| Start | Net profit per accounts |
| Add | Expenditure charged but not deductible; income taxable but not credited |
| Deduct | Profits credited but not taxable; deductible expenditure not charged |
| Result | Adjusted profit |
Allowable expenses
Section 20 of the NTA 2025 allows, if wholly and exclusively incurred to produce income: interest on debt used in the business (subject to the connected-person limit); rent and premiums on land or buildings occupied; salaries, wages and benefits; repairs; expenses of establishing or defending title to an asset; contributions to pension schemes approved under the Pension Reform Act; stock damaged or lost; bad and doubtful debts; research and development; expenses of the six years before trading began that would have been allowed after it; dividends or mandatory distributions of an approved real estate investment company; compensating payments in a regulated securities lending transaction that qualify as interest; and spending on assistive devices and disability products.
Disallowable expenses
Section 21 of the NTA 2025 disallows:
- capital repaid or withdrawn
- capital expenditure
- domestic or private expenses and assets not used for the business
- sums recoverable under insurance
- taxes on profit
- payments to unapproved pension or similar funds
- depreciation or impairment of any fixed asset or investment and unrealised exchange differences
- sums reserved out of profit
- payments to connected persons that do not follow the transfer pricing regulations
- expenses of earning exempt income
- expenses allowed in computing chargeable gains
- fines and penalties
- tax or penalty borne for another person
- compensating payments that qualify as dividends
- any expense on which VAT was due but not charged, or import duty or levy was not paid
Foreign currency expenses
An expense incurred in a foreign currency is deductible only up to its naira value at the official Central Bank of Nigeria rate for the relevant date or period. If the company converted at a higher rate, the excess is disallowed.
Bad and doubtful debts
A debt that became bad in the basis period, or before it, is allowed if it did not arise from a related-party transaction, the doubtful debt was estimated under generally accepted accounting principles, the tax authority is satisfied that it arose in the business that produced the profit, and there is documentary evidence of efforts to recover it.
Sums recovered after being deducted are added to profit in the year of recovery. Before 2026 (CITA) a specific provision was allowed and a general provision was disallowed; a later release of a general provision, which was never allowed, is deducted from accounting profit. Under the NTA the distinction is not drawn, but proof is required. Apply the law of the year of assessment in the question.
Donations
| Point | CITA (to 2025) | NTA 2025 (s. 163) |
|---|---|---|
| Recipient | Bodies listed in the Fifth Schedule | Public funds, statutory bodies, religious, charitable, educational and scientific institutions in Nigeria, diplomatic bodies, and emergency interventions |
| Limit | 10% of total profits; 15% of profits or 25% of tax, if higher, for tertiary and research bodies | 10% of profit before tax |
| Non-cash gift | Cost, with documents (pandemic rules) | Lower of market value at the date and the cost when acquired |
Research and development
Under CITA, actual expenditure was allowed and reserves for research were allowed up to 10% of profits, with a 20% investment tax credit for commercialisation. Under s. 164 of the NTA, spending in the period is allowed up to 5% of turnover, and proceeds from selling or transferring the outcome are taxed.
Waivers and refunds
If an allowed expense is later waived or refunded, the amount is income on the day of waiver or refund (s. 192). A waiver of a capital item, such as a loan, is a chargeable gain, not income.
Expenses of earning exempt income
If an expense serves both exempt and taxable income, only the part relating to taxable income is allowed: allowed = C × A ÷ (A + B), where A is income assessable to tax, B is exempt income and C is the expense.
Interest restriction
Interest paid to a connected person, including a foreign connected person, is capped at 30% of EBITDA. Banks and insurers that are subsidiaries of foreign companies are excluded, but the rule applies to Nigerian banks and insurers that pay interest to foreign subsidiaries. Disallowed interest is carried forward and deducted in a later year within the same cap, but not beyond five assessment years.
Connected persons are persons under common control, ownership or management, persons that receive a matching guarantee or deposit, and related parties under the Transfer Pricing Regulations 2018. A bad debt from a connected person transaction is not allowable.
Tax borne for others
If a company pays a rent of ₦1,000,000 net of withholding tax and remits ₦100,000 of withholding tax for the landlord, that ₦100,000 is tax borne for another person and is not deductible.
Worked examples
Example 1: foreign currency. A company pays US$10,000 for software support, booked at ₦1,600 per dollar. The official CBN rate for the date is ₦1,500.
- Allowed = 10,000 × 1,500 = ₦15,000,000.
- Charged = 10,000 × 1,600 = ₦16,000,000.
- Add back ₦1,000,000.
Example 2: exempt income. Profit is ₦2,000,000, of which ₦1,400,000 is taxable and ₦600,000 exempt. Shared expenses are ₦250,000.
- A = 1,400,000; B = 600,000; C = 250,000.
- Allowed = 250,000 × 1,400,000 ÷ 2,000,000 = ₦175,000.
- Add back ₦75,000.
Example 3: interest cap. EBITDA is ₦4,000,000. Interest of ₦1,500,000 is paid to a foreign connected lender.
- Cap = 30% × 4,000,000 = ₦1,200,000.
- Allowed ₦1,200,000; excess ₦300,000 is added back.
- Carry the ₦300,000 forward for up to five assessment years.
Example 4: donation. Profit before tax is ₦5,000,000. The company gives ₦700,000 in cash to a university and goods that cost ₦200,000 (market value ₦150,000) to a charity.
- Cap = 10% × 5,000,000 = ₦500,000.
- Goods are valued at the lower of market value and cost: ₦150,000.
- Qualifying gifts.
₦700,000 + ₦150,000 = ₦850,000, which exceeds the cap, so the allowed amount is ₦500,000. - The accounts charged ₦900,000 (₦700,000 cash and goods at cost ₦200,000), so add back ₦400,000.
How to score full marks
- List every item in the accounts and say allowed or disallowed, with the reason.
- Show each limit calculation separately: donations, research, interest.
- Check the year: CITA or NTA 2025.
- Deduct credits that are not taxable, such as profit on sale of assets.
- Add taxable income left out of the accounts.
- End with adjusted profit before capital allowances and losses.
Common mistakes in the exam
- Deducting depreciation.
- Allowing a general provision under CITA, or disallowing a proven one under the NTA.
- Applying the 10% donation limit to the wrong base.
- Forgetting the deduction for profit on disposal.
- Allowing a related-party bad debt.
- Ignoring the official exchange rate.
Quick revision
- Adjusted profit = accounts profit ± adjustments.
- NTA test: wholly and exclusively; s. 20 allowed, s. 21 disallowed.
- Donations 10% of profit before tax; R&D 5% of turnover.
- Interest to connected persons: 30% of EBITDA; carry forward five years.
- Exempt-income expenses: C × A ÷ (A + B).
- CAMA 2020: ss. 305, 308, 377(1), 378, 426, 427.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Under the NTA 2025 the general test for an allowable expense is that it is:
- Wholly and exclusively incurred in producing the income
- Approved by the Minister
- Charged in the accounts
- Paid in cash
Show the answer
A. Section 20: wholly and exclusively. CITA also required necessarily and reasonably.
Question 2. Which is disallowed in computing adjusted profit?
- Staff salaries
- Depreciation
- Rent on business premises
- Approved pension contributions
Show the answer
B. Capital allowances replace depreciation.
Question 3. Donations to approved bodies are limited under the NTA 2025 to:
- 5% of turnover
- 10% of profit before tax
- 15% of tax payable
- No limit
Show the answer
B. Section 163: 10% of profit before tax.
Question 4. Research and development spending is limited under the NTA 2025 to:
- 5% of turnover
- 10% of assessable profit
- 2% of capital employed
- No limit
Show the answer
A. Section 164: 5% of turnover.
Question 5. Interest paid to a connected person is capped at:
- 10% of turnover
- 30% of EBITDA
- 50% of profit
- 100% of interest paid
Show the answer
B. The cap is 30% of EBITDA.
Question 6. Excess interest disallowed in one year may be carried forward for not more than:
- One year
- Three years
- Five assessment years
- Ten years
Show the answer
C. Not beyond five assessment years.
Question 7. A foreign currency expense is allowed only at:
- Any rate the company chooses
- The official CBN rate for the date or period
- The parallel market rate
- The rate on the invoice
Show the answer
B. The excess over the official rate is disallowed.
Question 8. A waived liability that was previously allowed as an expense is:
- Ignored
- Income on the date of waiver
- A capital loss
- Exempt
Show the answer
B. Section 192: income on the day of waiver, release or refund.
Question 9. Under CITA, a general provision for doubtful debts was:
- Allowed in full
- Disallowed
- Allowed at 50%
- Carried forward
Show the answer
B. Only specific provisions were allowed.
Question 10. Which section of CAMA 2020 sets the director’s duty of care and skill?
- Section 308
- Section 400
- Section 405
- Section 409
Show the answer
A. Directors should test the assumptions behind a decision.
Written questions
Question 11 (10 marks). State, with reasons, whether each is allowed under the NTA 2025:
- (a) depreciation
- (b) a traffic fine
- (c) a bad debt from a sister company
- (d) VAT-able purchase on which VAT was not charged
- (e) an unrealised exchange loss
(10 marks)
Question 12 (20 marks). Zeta Limited’s net profit for 2026 is ₦12,400,000 after charging: depreciation ₦1,500,000; a traffic fine ₦60,000; a loan to a related company written off ₦150,000; building improvements ₦500,000; income tax provision ₦1,100,000; an unrealised exchange loss ₦90,000; a donation to a political party ₦200,000; and contributions to an unapproved pension scheme ₦120,000. It also charged a donation of ₦800,000 to an approved hospital, research and development of ₦400,000 (turnover ₦50,000,000) and a bad debt of ₦300,000 (not related).
Profit on sale of equipment of ₦300,000 is included in income. Compute the adjusted profit and explain each adjustment. (20 marks)
Question 13 (10 marks). EBITDA is ₦6,000,000. Interest of ₦2,400,000 is paid to a foreign connected lender. (a) Compute the deductible interest. (3 marks) (b) State the treatment of the excess. (3 marks) (c) Define a connected person. (4 marks)
Model answers
Show the model answer to Question 11
(a) Not allowed: capital allowances are given instead. (2) (b) Not allowed: fines and penalties are disallowed. (2) (c) Not allowed: a bad debt from a connected person transaction is not allowable. (2) (d) Not allowed: an expense on which VAT was due but not charged is disallowed. (2) (e) Not allowed: unrealised exchange differences are disallowed. (2)
Show the model answer to Question 12
Computation (20 marks). Net profit ₦12,400,000. (1)
Add back: depreciation 1,500,000 (1.5); traffic fine 60,000 (1.5); related-party loan written off 150,000 (2); building improvements, capital 500,000 (1.5); income tax provision 1,100,000 (1.5); unrealised exchange loss 90,000 (1.5); political donation, not an approved recipient, 200,000 (2); unapproved pension 120,000 (1.5). Total add-backs ₦3,720,000.
Allowed as charged:
- hospital donation ₦800,000 is below the 10% limit of ₦1,350,000 (10% of profit before tax of ₦13,500,000, being the net profit before the ₦1,100,000 tax provision) (2)
- research of ₦400,000 is below the 5% limit of ₦2,500,000 (1.5)
- the bad debt of ₦300,000 is allowed (1.5)
Deduct: profit on sale of equipment ₦300,000, dealt with under chargeable gains. (1.5)
Adjusted profit = 12,400,000 + 3,720,000 − 300,000 = ₦15,820,000. (1.5)
Show the model answer to Question 13
(a) Deductible interest (3 marks).
- Cap = 30% × ₦6,000,000 = ₦1,800,000. (2)
- Deductible = ₦1,800,000. (1)
(b) Excess (3 marks). The excess of ₦600,000 is disallowed this year. (1) It is carried forward and deducted in later years within the 30% cap. (1) No amount is carried beyond five assessment years. (1)
(c) Connected person (4 marks). A person under common control, ownership or management; (1.5) a person that is not connected but receives an implicit or explicit guarantee or deposit for matching debt; (1.5) a related party under the Transfer Pricing Regulations 2018. (1)
Pathfinder on Adjusting accounting profit, donations, interest limits and foreign currency
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The question asked for the adjusted profit of a Nigerian subsidiary. The solution added back depreciation, a revaluation loss, preliminary expenses, land acquisition costs, a general doubtful debt provision, building improvements, a court fine and a foreign exchange loss provision. That follows CITA; under the NTA the general provision rule and the exchange difference rule are stated in our table.
Revise first: Disallowable expenses
Source: ICAN Pathfinder, Advanced Taxation. Diets covered: November Diet, 2020.
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