How Much of Your Business Profits Is Actually Taxable?

A business may receive millions of naira from customers and spend a significant portion on salaries, rent, supplies, software and other operating costs. Some of these expenses may be deductible when calculating taxable profits, while others are not. The amount ultimately subject to tax depends on the applicable rules and the adjustments required by law.

Understanding this distinction can help business owners and startup founders plan their finances, maintain better records and avoid overestimating or underestimating their tax obligations.

Revenue Is Not the Same as Taxable Profit

Revenue is the money your business earns from selling products or providing services. Profit is what remains after accounting for costs and expenses. Taxable profit, however, is determined using the relevant tax rules, which may treat certain expenses, losses and asset purchases differently from ordinary accounting.

For example, imagine a company earns ₦20 million in revenue during an accounting period and incurs ₦12 million in expenses. Its accounting profit before tax would be ₦8 million.

That does not automatically mean ₦8 million is its final taxable profit. The company must determine which expenses are allowable under the Nigeria Tax Act 2025 and account for any relevant tax adjustments, qualifying losses and capital allowances.

The final figure may therefore differ from the profit shown in its accounts.

Which Business Expenses Can Reduce Taxable Profit?

Under section 20 of the Nigeria Tax Act 2025, qualifying expenses incurred in generating business profits may be deductible, subject to the conditions in the Act. These can include costs such as employee salaries, business rent, professional fees and other eligible operating expenses.

The important consideration is the nature and purpose of the expense, alongside the specific requirements of the law. An expense appearing in your accounting records does not automatically qualify for a tax deduction.

Section 21 identifies expenses that are not deductible when determining profits or income from a trade, business, profession or vocation. These include domestic or private expenses, capital expenditure, depreciation and certain taxes, penalties and other specified items.

Consider a startup founder who pays for business software and also uses the same bank account for personal shopping. The software cost may qualify for a deduction depending on its use and the applicable rules. The personal shopping does not become a deductible business expense simply because it was paid from the business account.

Keeping business and personal transactions separate makes it easier to identify eligible expenses and support the figures used in your tax computation.

What About Equipment, Business Losses and Other Deductions?

Some business costs require a different tax treatment. Buying computers, machinery, furniture or other long term assets, for example, may qualify as capital expenditure rather than an ordinary operating expense.

For companies, section 27 of the Nigeria Tax Act 2025 provides for deductions for qualifying capital allowances and eligible losses when determining total profits. Capital allowances are calculated under the relevant provisions of the Act and its First Schedule. They are not necessarily equal to the full purchase price of an asset in the year it is acquired.

Eligible losses may also reduce profits in subsequent years, subject to the statutory conditions. For companies, the loss must relate to the relevant business and is deducted from assessable profits to the extent permitted by section 27. Special restrictions apply to losses from digital or virtual asset transactions.

Individuals operating sole proprietorships are subject to the provisions governing personal income and business profits, so their calculations should not simply be treated as identical to those of incorporated companies.

These distinctions matter because the tax treatment of a transaction can affect when and how much may be deducted.

How Can You Work Out Your Taxable Profit?

Start with accurate records of your business income and expenses. Identify which expenses are allowable, separate capital purchases from ordinary running costs, and account for qualifying losses and capital allowances where applicable.

Return to our example of a company with ₦20 million in revenue and ₦12 million in recorded expenses. Its accounting profit is ₦8 million. If some recorded expenses are not deductible for tax purposes, adjustments may increase the profit used in the tax computation. Qualifying deductions or capital allowances may then reduce the amount, depending on the company’s circumstances and the applicable rules.

This is why there is no single percentage of revenue or accounting profit that every business can automatically treat as taxable. The calculation depends on the nature of the business, the transactions involved and the deductions permitted by law.

Invoices, receipts, contracts, bank statements, payroll records and asset purchase documents help substantiate the figures. Section 31 of the Nigeria Tax Administration Act 2025 also requires taxpayers to maintain records sufficient to establish their tax liabilities.

Keep Your Business Records Organised with LessaTax

Understanding taxable profit starts with knowing what your business earned, what it spent and which records support those transactions. When financial information is scattered across bank statements, payment notifications, spreadsheets and receipts, preparing an accurate tax computation becomes more difficult.

LessaTax helps freelancers, remote workers and business owners organise their financial records, track income and work related expenses, and keep supporting information accessible. Maintaining these records throughout the year can make it easier to review your finances and prepare for tax obligations.