You’re a small business owner in Lagos. Your business is doing well, and your accountant is putting together your tax returns, and you think, “Let me just deduct this, this, and this from my profit before they calculate my tax.” What most business owners miss is that Nigerian tax law keeps a firm list of disallowed business expenses that simply won’t count.

Sound familiar?

So here’s the thing: not everything you spend money on can be deducted from your business profit before tax. The Nigeria Tax Act, 2025 has a very specific list of expenses that simply cannot reduce your taxable profit. It doesn’t matter how creatively you record them in your books. The Federal Inland Revenue Service enforces this list, and it doesn’t matter whether you’re a solo trader or a mid-size Lagos company.

Let me be crystal clear about why this matters. If you don’t know this list, you could end up claiming deductions that get rejected. Or facing penalties, or worse, a tax audit that flags your business for the wrong reasons. So let’s break this down together.

Disallowed Business Expenses vs Genuine Deductions

Before we dive in, quick refresher: a deduction is a genuine business cost that reduces the profit you get taxed on. Disallowed business expenses are the opposite, costs the tax law refuses to accept as legitimate, no matter how you dress them up in your books.

If your business made ₦5,000,000 in revenue and spent ₦2,000,000 on legitimate running costs (rent, salaries, supplies), you’re only taxed on the remaining ₦3,000,000.

Deductions exist to make sure you’re only taxed on your real profit, not your total income. Makes sense, right?

But the law is strict about what counts as a “real business cost.” And that’s where things get interesting.

Rule 1: Your Personal Life Doesn’t Get a Business Discount

Now, I know what you’re thinking: “Can I deduct my personal expenses if I run them through the business account?”

Unfortunately, no.

If you personally buy a new phone or cover your child’s school fees, that’s personal spending. Same with a personal trip that has nothing to do with your trade. None of it can reduce your taxable business profit. Even if the money came out of the business account.

Why? Because allowing this would let your private spending ride on the back of your business tax bill, and the taxman is not here for that.

Rule 2: Buying Big Assets Is Not the Same as Running Costs

This distinction trips up a lot of business owners. Buying a building, machinery, or long-term equipment is not the same as a running cost. Stationery or electricity bills sit in a different category entirely.

If you buy a delivery van for ₦8,000,000, you can’t just deduct that whole amount from this year’s profit like you would with fuel or salaries.

Why the difference? Because that van builds value for your business over several years. It’s an investment, not a cost that gets “used up.” Separate rules (called capital allowances) exist specifically to handle assets like this, spread out over time. So don’t try to lump your capital spending in with your everyday running costs. It won’t fly.

Rule 3: Fines and Others’ Taxes as Disallowed Business Expenses

This next one is worth calling out directly, because a lot of people don’t realize it’s actually illegal to try.

You cannot deduct:

• Fines and penalties:  whether it’s a regulatory fine, a court penalty, or a fee for breaking the law
• Taxes you pay on someone else’s behalf: if you’re footing another person’s tax bill out of generosity or obligation, that’s on you, not the taxman

The government isn’t going to subsidize your legal troubles, and it’s definitely not going to subsidize your kindness toward someone else’s tax obligations. That’s not what deductions are for.

Rule 4: Unapproved Pension Contributions Don’t Count

If you’re contributing to a pension or retirement scheme for yourself or your staff, that’s great. But only approved schemes under Nigerian pension law qualify for deductions. Set up an unofficial or unapproved retirement fund? That contribution won’t reduce your taxable profit. So before you get generous with retirement benefits, make sure the scheme is properly recognized.

Rule 5: Watch Your Related-Party Transactions

This trips up bigger businesses especially. A “connected person” means a sister company, a related entity, or someone with close ties to your business. If you’re transacting with them, that transaction has to follow proper transfer pricing rules. If your company sells goods to your own subsidiary at a suspiciously low price to shift profit around, expect the taxman to disallow that expense entirely.

This rule exists to stop businesses from artificially moving money between related entities just to shrink their overall tax bill. It’s one of the law’s sharper teeth.

Rule 6: You Can’t Dodge One Tax and Still Claim Relief on Another

This is probably the cleverest part of the whole Act, and honestly, it makes sense once you see it. If VAT was legally due on something you bought but was never actually charged, you can’t deduct that cost. Same goes for imported goods that should have attracted import duty but didn’t. Why? Because it stops businesses from double-dipping, dodging one tax while still trying to benefit from a deduction tied to it. You can’t have it both ways.

Why Disallowed Business Expenses Matter for Your Books

This whole section of the Tax Act, the disallowed business expenses list, acts like a gatekeeper. It’s making sure only genuine, legitimate business expenses reduce what you owe. Personal spending, big asset purchases, fines, unapproved pensions, dodgy related-party deals, and non-compliant transactions stay firmly outside the gate.

Knowing this list isn’t just about staying out of trouble. It’s about running your business with confidence, knowing exactly what you can and can’t claim, and avoiding nasty surprises when tax season comes around.

So next time your accountant flags an expense as “non-deductible,” you’ll know exactly why, and you’ll be one step ahead of most business owners who are still guessing.
If you want the wider context, our Nigeria Tax Act 2025 overview walks through the whole law. We’ve also broken down carriers, dividends and business deductions and how company profits get taxed in separate posts.

– If this helped clear things up, share it with a fellow business owner who’s still confused about their deductions. Knowledge like this shouldn’t stay locked away in legal text nobody reads.

Feeling overwhelmed?

We know the terminology can feel dense, and it’s easy to read something like this and still not be sure where your own situation lands. If you’d like to talk it through, someone on our team would be genuinely happy to sit with you. Book a consultation and we’ll go through your specific circumstances, what applies to you, and what your next step looks like.

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