Tax deductions of carried-forward expenses

We operate a manufacturing company. In 2023, our company incurred significant marketing and consulting expenses in connection with the restructuring of company operations. However, due to internal accounting delays, those expenses were not recorded in the 2023 accounts. Instead, they were carried forward and claimed in the 2024 tax returns. When the Tanzania Revenue Authority (TRA) audited the accounts, they disallowed the deductions, arguing that the expenses were not incurred ‘wholly and exclusively’ in the production of income for the 2024 year of income. We believe this is unfair because the expenses were really incurred and only accounting delays occurred, which constitutes a valid basis for reconsideration by the Revenue Authority. Please guide us.

BM, Arusha

Your case reflects practical business challenges that, unfortunately, may not be recognised under the law. While the Income Tax Act, Cap. 332 [R. E 2023] permits deductions for certain business expenses, the Court of Appeal has recently made important points that every business owner should understand. The Court held that only expenses incurred wholly and exclusively in the production of income for the relevant year of income are deductible. This means that if you incur expenses in 2023, you must claim them in your 2023 tax return. You cannot push it forward and claim it in 2024. That is to say expenses relating to prior years cannot be claimed in a later year. Even if they are genuine business costs, the law requires strict compliance with the year in which they were incurred.

This case demonstrates how routine accounting decisions can give rise to significant tax disputes and why compliance with both the timing and evidence rules is critical. If your accountants delay recording expenses, you risk losing the right to deduct them. Tax law in Tanzania is unforgiving on this point. The safest practice is to ensure that all expenses are properly recorded in the year they occur. Keep meticulous records of invoices, receipts, and contracts because, without them, the TRA may disallow your claims. Consult your lawyer or tax consultant for further guidance.