Which Business Expenses KRA Allows and Which It Rejects

KRA allows a business expense when it passes three tests: it was wholly and exclusively for earning your income, it is not capital or personal, and it has an eTIMS invoice unless the law excludes it. Miss one test and the expense is added back to your profit, even though you really spent the money.

This matters more now, because KRA compares what you declare with its own data. These rules apply if you are taxed on profit. Turnover tax and the monthly residential rental regime are charged on gross receipts, so expenses are not deducted under them.

Test one: wholly and exclusively for earning income

Section 15(1) of the Income Tax Act allows expenditure wholly and exclusively incurred in producing the income. Section 16(1)(a) says the opposite for anything that is not.

So keep the records that show why a cost was for the business. A shared phone bill or a car used by the family needs a clear split, and this is much easier if you keep business and personal money apart.

Test two: not capital and not personal

Section 16 lists what cannot be deducted. The items owners run into most are:

• Capital spending, such as buying a machine or vehicle (section 16(1)(b)). You generally claim this through capital allowances under the Second Schedule, not as an expense.
• Personal and family costs, including school fees for employees’ dependants or relatives and personal entertainment (section 16(2)(a)).
• Hotel, restaurant and catering costs, unless they are for business trips, training or work conferences, or meals for employees on your premises.
• Holiday trips, apart from the limited home leave case in the law.
• Income tax itself, with a limited exception for some foreign tax (section 16(2)(c)).
• Costs you can recover under insurance, a contract or an indemnity (section 16(2)(b)).

Section 15(2) also names costs that can be deducted. They include:

• bad debts that meet the Commissioner’s tests
• advertising, to the extent the Commissioner considers just and reasonable
• costs incurred before the business started, if they would have been deductible afterwards
• the Affordable Housing Levy paid by a business
• employer contributions to a national provident fund or similar scheme set up by law

Test three: the eTIMS invoice

Section 16(1)(c) disallows any expense where the invoice was not generated from an electronic tax invoice system, unless the transaction is exempted under the Tax Procedures Act.

KRA’s November 2025 notice says expenses should be backed by a valid invoice transmitted with the buyer’s PIN where applicable. So always give your PIN when buying. An invoice without it may not be matched to you. Our eTIMS guide covers the basics.

Example. A company on the 30 percent rate has KES 100,000 of supplier costs with no eTIMS invoice and no exclusion. If KRA disallows them, its taxable profit rises by KES 100,000 and its tax by KES 30,000. The figures are for illustration only.

The exceptions

Section 23A(4) of the Tax Procedures Act and the Tax Procedures (Electronic Tax Invoice) Regulations, 2024 leave out certain transactions. The Regulations list:

• employee pay
• imports
• investment allowances, including internal accounting adjustments
• airline passenger ticketing
• interest
• fees charged by financial institutions
• expenses subject to withholding tax that is a final tax
• services from non-residents with no permanent establishment in Kenya

These transactions are still subject to the other two tests, and you need proper records for them. Imports, for example, are checked against customs data.

One wording difference: the Act says “payment of withholding tax and similar payments”, while the Regulations refer to final withholding tax. So do not assume every payment with tax deducted is excluded. A resident consultant’s fee, where the 5 percent is not final, should still have an eTIMS invoice.

Small suppliers

Under section 23A(3A), where a supply comes from a small business or small-scale farmer with annual turnover of up to KES 5 million, the purchaser issues the tax invoice. eTIMS has a buyer-initiated option for this, and the seller approves the invoice electronically. Keep the seller’s PIN and details, as you will need them.

What about old expenses?

In a June 2026 notice, KRA allowed valid business expenses without eTIMS or TIMS invoices to be uploaded when filing 2025 returns, subject to validation afterwards. That covered 2025 returns only. KRA says that from the 2026 year of income, all declared income and expenses must be supported by valid electronic invoices.

So for the return covering 2026, do not plan on the same allowance. If you claimed under the concession, keep the support ready, as validation comes after filing. Any earlier years are a question for a professional, based on the facts.

What to do each month

1. Ask for an eTIMS invoice with your PIN at every purchase, including small ones.
2. Sort costs into business, personal and capital in your books.
3. Mark excluded items and note why they are excluded.
4. Compare your expense ledger with your eTIMS purchase records, then chase what is missing.
5. Keep the documents for five years, the period in section 23 of the Tax Procedures Act. A related input VAT claim has its own rules and a much shorter time limit.

If you keep a monthly routine like this, your return should already agree with what KRA can see.