Deductible and Non-Deductible Business Expenses in Afghanistan

Deductible and Non-Deductible Business Expenses in Afghanistan

This guide outlines deductible and non-deductible business expenses for residents of Afghanistan according to the Income Tax Law of 2009, including examples and key considerations for managing tax liabilities.

Introduction

Understanding what business expenses are deductible can significantly impact a company's financial health and tax liabilities. This guide outlines deductible and non-deductible business expenses for residents of Afghanistan according to the Income Tax Law of 2009. For tax issues pertaining to non-residents, please refer to Guide 23, Tax Issues for Non-Residents.

What Expenses Are Deductible?

Expenses and costs ordinarily incurred in generating income are deductible from profit to determine taxable income. Article 18 of the Income Tax Law 2009 specifies the deductible expenses. Non-ordinary or unnecessary expenses are not deductible.

Deductible Expenses Include

1. **Production and Trade Costs**: Expenses related to production or trade, such as insurance and freight. 2. **Supplies and Utilities**: Costs of supplies, materials, fuel, electricity, water, and other ordinary expenses used in business operations. 3. **Wages and Salaries**: Payments for services rendered by employees, including wages, salaries, commissions, and fees. 4. **Interest on Business Loans**: Interest paid on loans used for business purposes. 5. **Dividends**: Dividends paid by legal entities organized under Afghan law. 6. **Rent**: Rent paid for property used in trade or business. 7. **Repairs and Maintenance**: Costs for repairing and maintaining business properties and equipment. 8. **Depreciation**: Depreciation of movable and immovable property used in business, according to the Income Tax Manual. Depreciation must be spread over the asset's useful life and cannot exceed the asset's cost. 9. **Business Taxes**: Taxes necessary for doing business or producing income, excluding income taxes. 10. **Damage from Disasters**: Losses from disasters (fire, earthquake) to the extent not covered by insurance, spread over three years. 11. **Bad Debts**: Losses from bad debts, provided they were previously included in taxable income and deemed unrecoverable. 12. **Other Business Expenses**: Other necessary expenses of doing business or holding property for income.

Example

An employee with a monthly salary of AFN 20,000, receiving a promotion to AFN 24,000, and a year-end bonus of 5%, would have total wages and bonuses deductible as follows: - Salary (first 6 months): 6 x AFN 20,000 = AFN 120,000 - Salary (second 6 months): 6 x AFN 24,000 = AFN 144,000 - Total Salary: AFN 264,000 - Bonus: 5% of AFN 264,000 = AFN 13,200 - Total Deductible Wages and Bonus: AFN 277,200

What Expenses Are Not Deductible?

Certain expenditures are not deductible under Afghan tax law. These include: 1. **Gifts and Donations**: Expenditures on gifts and donations are not deductible. 2. **Illegal Expenses**: Costs related to illegal activities. 3. **Income Taxes**: Income taxes are not deductible. 4. **Reserves for Contingencies**: Additions to reserves for contingencies or bad debts, except for specific financial institutions. 5. **Personal Expenses**: Costs for personal or household use, such as: - Payments for personal benefit - Maintenance or improvements to personal property - Interest on personal loans - Commuting costs - Personal insurance premiums **Example 1**: Purchasing a car for personal use cannot be deducted, even if it was bought using business income. **Example 2**: If a car dealership buys 10 cars but keeps 2 for personal use, only the cost of the 8 cars sold can be deducted: - Sales Receipts: 8 x AFN 200,000 = AFN 1,600,000 - Cost of Purchase (excluding 2 personal cars): 8 x AFN 160,000 = AFN 1,280,000 - Gross Profit: AFN 320,000

Additional Notes

There are no fees payable to the Ministry of Finance for tax guides or forms. Taxpayers must submit tax returns even if no tax is due to avoid penalties. Depreciation and other deductions must be clearly documented. For more information, refer to Afghanistan Revenue Department.