Tax Savings: Understanding In-Kind Donations in Nigeria

 

Alright, professionals! Let’s dig into something that sounds boring but is actually super helpful if you're running a business in Nigeria — implication of donations to your company income tax. You can save a good chunk of your hard-earned cash while contributing to public causes. And guess what? The Finance Act 2020 shook things up with some fresh rules, especially when it comes to in-kind donations. That’s right—donating more than just money can now help reduce your tax bill!

What Does the Law Say About Donations?

Let’s start with Section 25 of the Companies Income Tax Act (CITA) 1990. This section has always been a lifesaver for businesses in Nigeria looking to give back. Here’s the deal: If your company donates to certain funds or institutions, you can deduct the donation from your taxable profits!

Sounds great, right? But wait, there’s more:

- Your donation has to be made out of your profits (so if your company is making losses, tough luck).

- No, you can't deduct donations that are capital expenditure (i.e., spending that builds your long-term assets like a new factory). Only stuff that comes out of your regular profits qualifies.

- And most importantly, you can only deduct up to 10% of your total profits. So don’t think you can donate everything and pay zero tax!

The eligible funds and institutions? It’s a mixed bag: public funds, statutory bodies, and other organizations like schools, churches, and charities. But the catch is that they need to be listed in the Fifth Schedule of the Act, meaning they’ve got to be recognized by law. You can’t just donate to a cause or an institution and get a tax break!

But Then Came 2020…

Fast forward to 2020, and things took a turn with the Finance Act 2020, which brought in two shiny new subsections under Section 25—subsections (8) and (9). And this is where it gets really cool.

For the first time ever, the law made room for in-kind donations. Yes, it’s no longer just about giving money; you can now give things like food, medical supplies, or whatever else is needed in a crisis—especially during pandemics or natural disasters.

This change was a direct response to—you guessed it—COVID-19. So, while some businesses were digging deep into their wallets to help fight the pandemic, the government decided, "Let’s reward them!"

What Exactly is an In-Kind Donation?

 

Let’s break it down in simple terms. An in-kind donation means instead of giving cash, you donate goods or services. It could be anything from face masks to medical equipment to food packs for communities affected by a natural disaster. Basically, instead of handing over cash, you give tangible stuff that’s needed in the moment.

But how do you get that tax deduction for your in-kind donation? Here’s what you need to know.

How Do You Get That In-Kind Deduction?

There are two ways this works, depending on whether you:

1. Bought the items for donation: Maybe you went out and bought a truckload of medical supplies to donate to the government. In this case, the cost of purchasing those items can be deducted from your assessable profits.

2. Manufactured the items yourself: If you’re in the business of manufacturing things (like face masks or hand sanitizers), you can deduct the cost of producing those items as part of your in-kind donation.

But hold on—it’s not a free-for-all. There are rules.

What’s the Catch? The Requirements

To make sure people don’t abuse this system, there are a few hoops you’ve got to jump through. Here are the basic requirements for claiming your in-kind donation deduction:

1. Documentation is Everything: You need to prove that you actually made the donation. So, receipts, invoices, or other official paperwork showing the cost of the items donated are a must. No paperwork, no deduction. Period.

2. It Must Be Reasonable: The donation must be WREN i.e., wholly, reasonably, exclusively, and necessarily incurred. Basically, this means that you can’t just donate weird or unnecessary items. It has to make sense. For example, if there’s a pandemic, and you donate face masks—cool, you’re golden. But donating something random like designer handbags? Not so much.

3. Where the Donation Goes Matters: You can’t just give your donations to anyone. It has to go to a Federal Government fund, a State Government fund, or an agency that’s been designated by the government to handle these things.

The Limitations: Sorry, No Unlimited Deductions

Remember how Section 25 only allows donations up to 10% of your total profits? Well, the same applies here. Even if you’re the most generous business owner in the world, you can only claim up to 10% of your assessable profits after all your other donations are accounted for.

So, if you’ve already given a chunk of your profits to a charity or a public fund earlier in the year, your in-kind donations will count within that same 10%.

 

Let’s Walk Through an Example

Okay, let’s make this more relatable. Say your company has N50 million in total profits for the year. You decide to donate N2 million to a charity, and then during a natural disaster, you donate food and medical supplies worth another N3 million to a government relief fund.

Here’s how your tax deduction will work:

1. The law says you can deduct up to 10% of your total profits, so that’s N5 million (10% of N50 million).

2. Your N2 million cash donation is counted first.

3. Then, the cost of your in-kind donation—N3 million—comes next.

4. Total deductible donations = N2 million (cash) + N3 million (in-kind) = N5 million.

And boom—you’ve maxed out your deduction for the year!

How Do You Apply These Deductions?

Now that you know how it works, let’s talk about the actual process for getting these deductions approved. You can’t just wave a receipt in the air and expect a tax break.

Here’s the general process:

1.       Keep Proper Records: Make sure every penny you spend on donations is accounted for. That means detailed receipts, invoices, delivery notes—whatever you need to prove the cost of your donations.

2.       Submit Documentation to the Tax Authorities: When filing your company’s income tax returns, include all the relevant documents showing the cost of your in-kind donations. You’ll need to demonstrate that these costs were “wholly, reasonably, exclusively, and necessarily” incurred.

3.      Wait for the Approval: Once you’ve submitted everything, the tax authorities will review your documents and, if everything checks out, approve your deduction.

What’s the Bottom Line?

The introduction of in-kind donations under the Finance Act 2020 is a game-changer for businesses that want to make a real impact in times of crisis. Whether it's a pandemic, natural disaster, or other emergency, you now have more flexibility in how you contribute—and you get rewarded with tax savings.

But don’t forget:

- You can only claim donations up to 10% of your total profits.

- You need proper documentation for every donation.

- Make sure your donation is going to a qualified government fund or agency.

So the next time there’s a crisis, and you’re thinking of helping out, remember—you can now give more than just money. And your business can benefit too.

Final Thoughts: Giving Back Feels Good, Saving on Taxes Feels Better!

By understanding the donation rules under the Finance Act 2020, you can not only contribute to good causes but also lighten your tax load at the end of the year. So go ahead—make those donations count (both for your community and your bottom line).