All persons with businesses in Kenya are expected to pay corporate income tax. Every taxpayer wants to stay on the right side of the KRA. But sometimes taxes can be confusing. There are taxpayers with many corporate income tax questions. We get it.
In this article, we have answered ten corporate income tax questions. We break down the big questions about corporate income tax in Kenya.
1. What is Corporate Income Tax?
Corporate income tax is a tax on your company’s taxable profits. If your business is registered in Kenya, you must pay income tax as long as you have any taxable profits. This applies to limited companies and even some branches of foreign companies operating in Kenya.
Your taxable profit is your total income minus your allowable business expenses. The taxable profit is a key part of tax compliance. It is the basis of your income tax.
2. What is the Current Income Tax Rate?
The current standard tax rate for resident companies is 30%. Non-resident companies pay income tax at a higher rate.
If you operate a small or medium-sized enterprise, there is the option of the Turnover Tax (TOT). TOT is a simple tax of 3% on your gross sales without deducting any expenses. It is designed for businesses with low turnover. Your annual turnover must be below kshs 50 million to qualify.
There is also a special rate for companies in Special Economic Zones. They enjoy a lower rate for the first ten years.
3. When is the Tax Due?
Remitting income tax has deadlines. Missing the tax deadlines will lead to fines, penalties, interest, etc.. You do not want that because it can be costly. You must establish the correct amount of tax to pay and at what point.
Corporate income tax is paid in advance. This is called payment on an installment basis. You pay it in instalments throughout the year of income. The due dates are usually on the 20th of the 4th, 6th, 9th, and 12th months of your accounting year. That means you will pay in four installments.
After your year ends, you will establish the correct amount of tax payable for that year of income. You will do this by conducting an annual audit. If you did not pay 100% tax in the four instalments, you will pay the balance before the end of the 4th month after the closure of your year of income.
For example, if you established that your tax for the 2024 year of income was kshs 150,000 and each installment you paid kshs 40,000, what is the balance of tax?
Total tax – kshs 150,000
1st installment – kshs 40,000
1st installment – kshs 40,000
1st installment – kshs 40,000
1st installment – kshs 40,000 – kshs 120,000
Balance of tax – kshs 30,000
Once you make the balance of tax payment, you will file your tax returns.
By the end of the 6th month, you will be expected to file your tax return. After filing your tax return, if you find that you made a mistake, you can amend the tax return. However, the tax commissioner will have to approve the amendment.
Also note that the tax commissioner can amend your tax return after they establish that you did not pay the correct amount of tax for the year of income.
4. What expenses are deductible?
The tax law allows for the subtraction of business expenses as long as they are allowable deductions. This is where you can save money. Allowable deductions are the business expenses that are related to the generation of the taxable income. The deductions will lower your taxable profits. This means that you will pay less tax.
The following are some of the business expenses that you can deduct.
– Employee salaries and bonuses.
– Rent for your business premises.
– Utility bills like electricity, internet, and water.
– Cost of goods you sold.
– Marketing and advertising expenses.
– Interest on business loans.
Remember, you must keep the taxable invoices and receipts for all your expenditures. The tax commissioner will ask for them as evidence of your expenditure.
5. How are tax returns filed and payments made?
Filing tax returns is now primarily done online. The KRA’s iTax guide on how to do it is your best friend. The iTax portal makes the process straightforward.
To file your tax returns, you log in to your KRA iTax profile. You find the correct tax system you want to file. You fill in your financial details in the provided template. The iTax system often calculates the tax for you. Then, you submit it.
Paying tax is not complicated. You need to generate a payment slip on iTax and choose where to pay. It can be through the bank or mobile money.
6. What if I Make a Loss?
Businesses have ups and downs. Businesses make profits and losses all the time. If your company makes a loss, you do not pay corporate income tax for that year of income. The good news is that you can carry forward that loss.
You can use carried-forward losses to reduce your taxable profit in the coming years of income. This is called a tax loss carry-forward. It is a relief for startups and businesses that are not making profits.
7. What Happens if I Do Not Comply?
All taxpayers are expected to comply with tax rules, regulations, and laws. Failure to comply leads to problems you want to avoid, which will result in extra tax payments and sometimes an inability to operate your business.
You will face fines, penalties, and tax interest. These will be added to your tax bill. You will also pay interest on any late payments. In severe cases, it can lead to the freezing of your bank accounts and personal identification number (PIN). It can even lead to prosecution in a court of law. Staying tax compliant is always cheaper and less stressful.
8. Can I Claim Use of a Vehicle in the Business?
The expenses of any vehicle that is used to generate taxable income in the business can be claimed. However, there are rules to follow. If the vehicle is used solely for business, all its costs are deductible. This includes fuel, repairs, and insurance.
But if you use the vehicle for both business and personal trips, you must separate the expenses. You can only claim the portion used to generate income for the business. Keep a logbook to track your business mileage. It makes everything easier during an audit.
9. How Long Should I Keep My Records and Documents?
Keep them for as long as possible. Do not throw those records and documents away. The tax commissioner requires you to keep all your records for at least five years. This includes invoices, receipts, bank statements, and your filed returns.
Why? The tax commissioner can audit your business for the past five years. Having your records and documents ready is an indication that you are tax-compliant. It also shows that you are an organised business owner.
Understanding corporate income tax in Kenya does not have to be a headache. It is about knowing the rules. It is about keeping good records. And it is about using the iTax guide to file on time. Manage your taxes well, and then you can focus on what you do best: growing your business.
Feeling more confident about corporate tax? We hope so. What other business topics are confusing you? Is it VAT or payroll taxes? Share it through our email. For a thorough analysis of your specific tax situation, always consult a tax expert in Kenya.
Related Articles:
- Individual income tax questions – HERE
- Income tax deductions – HERE
- How to file income tax returns – HERE
Read More Articles – HERE
For tax consultancy and investment advisory – HERE
