19 Jan 2024

Small Business Tax Myths and Misconceptions

Nigerian Tax Academy

Debunking Myths: Common Misconceptions about Small Business Taxation in Nigeria

Owning a small business is exciting, but navigating the world of taxes can be overwhelming. Here's a breakdown of some common misconceptions small businesses in Nigeria face, along with the reality of tax regulations:

Myth #1: If the Government doesn't come to collect taxes, you are excused from paying

Reality:

Tax payment is a civic duty and the responsibility of each individual, business or company. By the time the government comes to collect taxes that are already due, that individual or business is already in violation and often has to pay with interest and penalties. So know your tax obligations and do them, so you and your business are in compliance.

Myth #2: Small Businesses Don't Need to Worry About Taxes Until They're Profitable.

Reality:

Paying your taxes is just one of many compliance requirements. Even if your small business isn't generating significant profits yet, you might still have tax obligations. Here's why:

1. Filing Requirements: Regardless of your profit level, you are still obligated to file annual tax returns with the Federal Inland Revenue Service (FIRS). This establishes your business and ensures compliance.
2. Value Added Tax: If your business turnover exceeds N25 million (subject to change), you are required to register for VAT whether your business is profitable or not. This means collecting VAT on your sales and remitting it to the government. If less than N25m, then registration is voluntary.
3. Withholding Taxes (WHT): If your business makes certain payments, such as fees to contractors or dividends to shareholders, you might be responsible for withholding taxes (WHT) at source and remitting them to the government.

Reality:

Paying your taxes is just one of many compliance requirements. Even if your small business isn't generating significant profits yet, you might still have tax obligations. Here's why:

1. Filing Requirements: Regardless of your profit level, you are still obligated to file annual tax returns with the Federal Inland Revenue Service (FIRS). This establishes your business and ensures compliance.
2. Withholding Taxes (WHT): If your business makes certain payments, such as fees to contractors or dividends to shareholders, you might be responsible for withholding taxes (WHT) at source and remitting them to the government.

Myth #3: All Businesses are Taxed the Same.

Reality:

The type of tax you pay depends on your business structure and income source. Here's a breakdown:

1. Companies Income Tax (CIT): This applies to the annual profits of registered businesses. However, smaller businesses might qualify for lower CIT rates or even exemptions.
2. Personal Income Tax (PIT): If you operate as a sole proprietorship or partnership, your business income is reported on your personal tax return and taxed at individual income tax rates.

Myth #4: Having a separate account that tracks business expenses is sufficient documentation for my business.

Reality:

Bank account is just one of the documents required in the event of an audit. Maintaining proper records of your income and expenses is crucial for tax purposes.

1. WREN Test: This says that for an expense to be allowed for tax, it has to be Wholly, Reasonable, Exclusively, and Necessary for the business to generate a profit.
2. Record Keeping: Receipts, invoices, and bank statements serve as evidence of your business transactions. They are essential for calculating taxable income, claiming deductions, and demonstrating compliance during tax audits.

Myth #5: Government does not support small businesses with tax incentives.

Reality:

The Nigerian government recognizes the importance of fostering small businesses. Here are some potential benefits you might be eligible for:

1. Tax Exemptions: Businesses with a turnover below a certain threshold might be exempt from paying CIT.
2. Reduced CIT Rates: Qualifying small businesses might enjoy lower CIT rates compared to larger companies.
3. Investment Allowances: Claim allowances on the cost of qualifying capital expenditures, which can reduce your taxable income.

Finally:

Consulting a qualified tax advisor can help you understand your specific tax obligations, maximize benefits, and ensure you're filing everything correctly. By debunking these misconceptions and seeking professional guidance, you can navigate the tax system with confidence and focus on growing your small business.