Deductions - Quartet Consulting

Deductions:

Last reviewed – 26 February 2025

General Deduction Principle

Expenses are deductible if they are wholly and exclusively incurred to generate taxable income, unless expressly stated otherwise.

Depreciation and Capital Allowances

Depreciation & Depletion: Accounting depreciation is not deductible, but capital allowances are provided at varying rates.

Capital Allowance Rates:

a) Capital Expenditure on Buildings

Category	Allowance Rate
Hotel buildings	50% in the first year, then 25% annually
Buildings for manufacturing, hospitals, petroleum storage, and educational purposes (including student hostels)	10% annually
Commercial buildings	10% annually

b) Capital Expenditure on Machinery & Equipment

Category	Allowance Rate
Machinery for manufacturing, hospital equipment, ships, aircraft, mining, and exploration operations	50% in the first year, then 25% annually
Motor vehicles & heavy earthmoving equipment	25% annually
Computers, software, filming equipment, furniture, fittings, and telecommunications equipment	10% annually
Farm works	50% in the first year, then 25% annually

c) Other Deductibility Rules

Non-Deductible Items

Item	Treatment
Goodwill	Cost of acquisition & amortization not deductible (capital in nature)
Start-up expenses	Deductible if conditions met
Fines & penalties	Not deductible (not related to income generation)
Kenyan income taxes	Not deductible
Foreign income taxes	Deductible if no tax credit relief available under a DTT

Interest Expenses

Interest deductions are capped at 30% of EBITDA for loans from non-resident lenders.

Loans from resident lenders are exempt from this restriction.

Exemptions from interest restriction apply to:

1	Microfinance institutions & registered micro/small enterprises
2	Banks & financial institutions
3	Companies manufacturing human vaccines
4	Manufacturing firms investing at least KES 5 billion in the last five years
5	Manufacturers investing KES 5 billion outside Nairobi & Mombasa counties
6	Holding companies regulated under the Capital Markets Act
7	Affordable housing companies (with Cabinet Secretary’s approval)

Deferred Interest Deductions:

Unused interest deductions can be carried forward for up to three years.
If interest expense falls within the 30% EBITDA limit in future years, the previously restricted interest becomes deductible.

Foreign Exchange Losses: If a taxpayer does not meet the interest restriction threshold, realized foreign exchange losses can be deferred and claimed over five years.

Bad Debts

Deductible when confirmed irrecoverable as per Income Tax Act (ITA) guidelines.

Charitable Contributions

Donations to qualifying charities & public works are deductible.
Disaster relief donations to the following entities are deductible:

Kenya Red Cross
County governments
Any institution managing a Presidentially declared national disaster

Net Operating Losses

Loss Type	Treatment
Tax-computed losses	Carried forward indefinitely
Losses must be offset against	Income from the same source

Payments to Foreign Affiliates

Transfer pricing rules apply.
Expenses incurred by non-residents through a Kenyan Permanent Establishment (PE) may have deduction restrictions.