CH;3

Expenses and Deductible Costs

Conditions for Deductible costs
1- The expense should be real and actually paid.
2- The expense should be reasonable in amount and in its occurrence.
3- The expense should be related to the commercial or industry activity of the firm and essential for
carrying out its activities.
4- The expense should be related to taxable revenue.
5- The expense should be supported by documents.

Article (23) of the law stated some specific costs and expenses to be deductible as follow:

1-Interest on Loans »If

» the entity borrowed loans to be used in the activity (must
not exceed double credit rate declared by Central Bank).
2- Fees and taxes »Paid
» by the firm, except for the tax paid by the tax payer
according to this law.
3- Social insurance »Paid
» by the entity in favor of their employees (must not
exceed 20% of the total salaries).
4- Insurance premium »in
» the favor of the tax payer against disability or death
(must not exceed 3,000 pound)
5- Donations to the »Deductible
» whatever their value.
Government
6- Donations to Egyptian »organizations
» and foundations such as educational
non – Governmental institutions and hospital ( must not exceed 10% of the
annual net profit)
7- Donation to private »Not
» deductible.
sector [Poor People]
8- Financial penalties »Not
» Deductible if (not for illegal action).

9- Allowances »Different
» types of reserve and allowances ( not deductible)

The concept of Cost and Expenses

1- Revenue Expenditures: 2- Capital Expenditure: 3- Deferred Revenue
Expenditures:
»ᴥThe
» cost the can be »ᴥsuch
» as Funds used by »ᴥsuch
» as payments in
charged as an expense a company to acquire advance or unearned
as soon as it is incurred. physical assets such as revenue recorded in
By using the matching building and equipment. balance sheet or income
principle to link expenses statement.
incurred to revenues
generated.
Tax Accounting
Chapter 03 1
 Illustration(01):
The net income of AHMED company for 2014 was 150,000 the tax inspection revealed the following:
1- LE. 10,000 a personal insurance policy on one of the partners was recorded.
2- L.E. 9000 mobile bill for one the partners was not recorded as it considered personal despite it
was used in both of the operation of the firm besides the personal use of the partner.
Required: determine the tax effect of these transactions,

Net income 150,000

Add
Personal Insurance Policy ( mustn't be deducted) 7,000
Deduct
Mobile benefit (must be deducted 2/3 from 9000) (6,000)
Taxable income 154,000

Illustration(02):
The net profit of ALY company for 2013 was L.E. 100.000, the tax inspection revealed the following:
1- ALY company recorded in its general expenses an amount of LE. 15,000 as reserves to meet
emergency, and did not included in the expenses an amount of L.E. 3,000 an advertising bill for the
expenses of the year because the bill was not paid until the end of the year.
Required: state the impact of these findings on determining taxable profit.

Net income 100,000

Add
Contingency reserve because it represents for-profit use 15,000
( mustn't be deducted)
Deduct
Advertising bill of the year, according to an accrual basis (3,000)
is determined on the basis of which the net profit for the
taxable (must be deducted)

Tax Accounting
Chapter 03 2
 Illustration(03):
HASSAN company achieved a net loss of 40,000 pounds in 2013, and it became clear that the facility
included in expenses the amount of 2,500 pounds paid donations to a charity recognized.
Required: state the impact of these findings on determining taxable profit.

Net Loss (40,000)

Add
Donations paid to a charity because the facility has 2,500
achieved a loss during the year (must not deducted)

Taxable income (37,500)

Illustration(04):
MOHAMED company showed net profit of 100,000 pounds in 31/12/2014 in income statement,
and after deducting general and administrative expenses amounted to 30,000 pounds, a
comprehensive 5,000 pounds gratuities and 2000 pounds expenses cleaned unfavorable
documents, and the rest is available to him adequate documentation.
Required: Deviate taxable profit for this company.

Answer
Net Income 100,000
Add
The maximize limit of deducting non documented 4,900
expenses = 7% * 30,000 (general and administrative
expenses) = 2100
Non documented expenses = 7000 pounds Increased
amount = 7000 – 2100 = 4900 pounds
(must be added)
Taxable income 104,900

Tax Accounting
Chapter 03 3
Types of Deductible Costs and expenses
First group: includes items of costs and expenses stated by the tax law.

Second group: includes some other expenses and costs that has been leaved to the judgment of
the investigators.

Third group: includes costs and expenses that not considered as deductible costs and
expenses.

Fourth group: includes cost items considered

First group includes items of costs and expenses stated by the tax law.

1- Interest on loans »ᴥThe

» income tax law states that Interests on loans used in the
activity, regardless of their value, which not exceed double the
credit and discount rate declared by the Central Bank.

2-Depreciation »ᴥThe
» income tax law states that asset depreciation deduction
established and explain the calculation of depreciation for assets
as follows:

1- 5% of the cost of purchase, development of the buildings, facilities and

equipment.

2- 10% of the cost of purchase, development, improvements any of

the intangible assets that are purchased- including the good will of the
activity- for each tax period.

3- 50% of the depreciation base of computers and software programs.

4- 25% of the depreciation base of other assets such as Machines.

Depreciation Base
book value of the assets
Add
the cost of improvements the assets (net worth)
Deduct
the accumulated depreciation and the value of the sale of
assets that has been disposed.
Depreciation basis

»♥
» If the depreciation base is negative, add to the profit.
Noted that:
»♥
» If the depreciation base in positive but not exceed 10,000 L.E is
fully deducted from the profit.

Tax Accounting
Chapter 03 4
 Illustration(01):
KHALED company included a net profit of 500,000 pounds in the income statement, In addition to
that the depreciation charged to income statement the following amounts:

1-60,000 pounds for depreciation of public trademark owned, within the allowable tax rate.

2- 100 thousand pounds fully the value of goodwill, which was paid for by the company when they
purchased the assets from another entity.

Determination of the taxable profit.

Net income 500,000

Add
1- Depreciation of trademark(not adjusted) because -------
recorded at allowable tax.
2- The value of goodwill not deductible but the 100,000
depreciation of goodwill only is deducted
Deduct
Tax depreciation of goodwill = 100,000 x 10% = 10,000 (10,000)
Taxable income 590,000

Illustration(02):
AHMED company included a net profit of 50,000 pounds in the income statement , in addition to that
its expenditures included within the amount of 6,000 le a loss of machinery and equipment by 10%of
the cost of historical amounting 60,000 pounds (rate of depreciation approved was 25% per year ) . it
has been shown that the company had a revaluation of the values of its assets in the previous year on
the occasion of joining a new partner for company . the value of these machines and equipment after
revaluation was 90,000 pounds , the tax authority has adopted revaluation losses expensed in the
previous year.
Determining the taxable profit.

Net accounting profits (from the income 50,000

statement )
Add
Accounting depreciation as appeared in financial 6,000
statement (calculated by wrong rate was 10%)
Deduct
Machines allowable tax depreciation (22,500)
(90,000 x 25% =22,500 pounds)
Net taxable income 33,500
Tax Accounting
Chapter 03 5
 Illustration(03):
IBRAHIM company included a net profit of 30,000 pounds in the income statement, in addition to
that its expenditures included the amount of 10,000 pounds which was the value of depreciation
of cars owned by the company. It has been shown that the cars were depreciated in previous years
using the same depreciation rate adopted by the Tax Law. Also the comp[any did not include within
its expenses the value of furniture depreciation because it was fully depreciated in the company
records, but not in the tax records. The balance of depreciation basis for this furniture was 60,000
pounds and the depreciation tax rate approved 25% annually.
Determining the taxable profit.

Description Amount
Net accounting profits (from the income statement ) 30,000
Add
Depreciation value of cars fully depreciated in company 10,000
records ( not allowed to calculate depreciation of these
assets even if they are still usable by the company.
Deduct
Depreciation value of furniture that has been depreciated in (15,000)
the company records (60,000 x 25%)
Net taxable income 25,000

Illustration(04):
OSAMA company included a net profit of 100,000 pounds in the income statement, in addition
to that its expenditures included the amount of 15,000 pounds as depreciation of buildings and
construction, the carrying cost 150,000 pounds while the percentage of approved tax is 5% per year
for this type of asst. Also included within its expenditure amount of 6,000 pounds for depreciation of
purchased trademark with a carrying value of 30,000 pounds, note that the percentage of approved
tax is 10% per year for this type of asst.
Determining the taxable profit.

Net accounting profits (from the income statement ) 100,000

Add
- Accounting depreciation for building 15,000
- Accounting depreciation for trademark 6,000
Deduct
- Taxable depreciation for building (150,000 x 5%) (7,500)
- Taxable depreciation for intangible assets (3,000)
(trademark) 30,000 x 10% = 3,000
Net taxable income 110,500

Tax Accounting
Chapter 03 6
 Illustration(05):
REDA company included a net income of 40,000 pounds in the income statement during the year
2013, in addition to this its expenditures included the amount of L.E 6,000 for depreciation of office
furniture (20% annually). The office furniture was purchased on 10/1/2013 and was actually used in the
company operations starting this date, it was purchased at a cost amounting to 120,000 pounds. The
approved tax rate for depreciation is 25% annually.

Determining the taxable profit.

Description Amount
Net accounting profits (from the income statement ) 40,000
Add
- Accounting depreciation for furniture (20% x 120,000) 6,000
Deduct
- Taxable depreciation for furniture 120,000 x 25% x 3/12 (7,500)
Net taxable income 38,500

3-Additional (accelerated) »ᴥ
» One of the advantages provided by law 91 of 2005
states that 30% of the cost of machines and equipment
3-Accelerated {Additional} purchased by the firm whether they are new or used
Depreciation which the firm manufactures for use in production .this
action result in increased cost deductions in the first
year of machines acquisition. , which lead to decrease
in net profits subject to tax this year . this action may
encourage the fund companies to purchase equipment
that is why we consider this accelerated depreciation an
advantage

»ᴥ
» Accelerated depreciation is not an exemption from
tax, but postpones tax debt.

Illustration(01):
Mohamed company included a net income of 120,000 pounds in the income statement during the
year 2014, in addition to bought a machine to be used in its operation , and the cost of acquisition of
this machine amounted to 360,000 pounds , and the company started its use from the first month of
July for the same tax period . as the company depreciates those machines at a rate of 10% annually ,
according to accounting standards the income statement included depreciation for this machine for
its use until the end of the tax period amounted 9,000 pounds.

Show the impact of this investment spending on the net taxable income.

Tax Accounting
Chapter 03 7
Book value -----------
Add;
Cost of acquisition of this machine and 360,000
development and installation
Deduct;
Accumulated or accelerated depreciation (108,000)
(30% x 360,000) =108,000
Deduct
Sold for during the period ------------
Depreciation basis 252,000

✎ Tax depreciation for machine =

✎ Accelerated depreciation = 108,000
✎ Normal depreciation = (25% x 252,000x 6/12) =31,500
Adjustment sheet
Net income 120,000
ADD: Accounting depreciation expense 9,000
Deduct: Taxable depreciation (108,000)
(31,500)
Taxable net income (10,000)

Tax Accounting
Chapter 03 8
 4- Fees and taxes charged to the »ᴥ
» Tax law allowed fund companies to deduct
fees, duties, real estate tax.
juridical person.
»ᴥ
» The following conditions must be met in
order to consider fees and taxes as deductible
costs

1- Fees , duties must be related to the activities of

the juridical person.

2- The tax on the salaries of the employees of the

company are not consider as deductible costs
because its burden falls on the employees not on the
company.

3- Fees , and taxes charged to juridical person must

be documented and related to the current year in
order to be deducted.

4- Custom taxes paid on imported fixes assets

is not considered as deductible costs because
they are added to the price of the asset and then
depreciated over its useful life.

Noted that »ᴥ
» taxes on imported goods it is considered
deductible cost.

Illustration(01):
Ahmed company included a net income of 300,000 pounds in the income statement during the year
2014, in addition to this the company incorporated in its expenses 600,000 as fees and taxes . audit
process revealed that this amount includes the following;
•An amount of 40,000 taxes on the salaries of employees , that the company has deduct and
supplied to the tax authority.
•An amount of 50,000 foreign fees due and paid on one of the transactions made by the entity
abroad .
•An amount of 10,000 delay fine for not paying the taxes due on the company’s profits for previous
years.
•An amount of L.E 15,000 deducted tax on a commission paid to broker in one of the transactions
carried out by the company in Egypt.
•An amount of 130,000 customs taxes on machinery and equipment used by the company in its
activity.

Determine the taxable profit

Tax Accounting
Chapter 03 9
Net income 300,000
Add;
- Payroll taxes not on company 40,000
- Foreign fees allows as deductible cost ( allowed to deduct) 10,000

- Delay penalties for not paying taxes because this amount does -------
not represent a cost on the company (not deductible)
- tax on commission paid to a person’s (not deductible) because 15,000
the burden of it does not fall on the company
- Custom duties on machinery and equipment are not allowed 130,000
because these are considered capital expenditures and should be
added to the value of machinery (not allowed to deduct)
Taxable net income 495,000

Tax Accounting
Chapter 03 10
 5- Social Insurance premiums »♥
» Law 91 of 2005 stipulated that the social insurance
premiums assessed on the company owner for the
benefit of the employees and in his favor is deductible
cost.
»With
» limit [12% of annual salaries]

Illustration(01):
MAGED company included a net income of 20,000 pounds in the income statement during the year
2014, in addition to this its incorporated within its expenditures an amount of L.E 10,000 as social
insurance premiums which included the following
O This amount includes 2,000 employees share in social insurance .
O The remaining represent share of company in social insurance to their employees , noting that the
annual salary for workers 50,000 and insurance premiums binding on employer account for 12% of
the employee monthly salary.

Determine the taxable profit.

Net income 20,000

Add
- Employees share in the social insurance premium are not 2,000
deductible (on employees themselves)
- Excess over company share in social insurance for employees 2,000
Because company’s share in the insurance =10,000 – 2,000 =8,000
But legally permitted = 50,000 x 12% = 6,000
(8,000 – 6,000)
Taxable net income 24,000

Tax Accounting
Chapter 03 11
 6-special investment funds and withholds »Conditions
» must be met to consider these
amounts as deductible costs

1- The fund is subject to the regulations and rules

of the insurance funds.

2- The purpose of the fund is the saving pension

or others with a saving nature.

3- Not exceed 20% of total wages and salaries of

all employees in the company’s departments.

4- To be a separate fund or independent from

the company’s fund and invested in the name of
the fund not the company.

Illustration(01):
ABDOU company included a net income of 25,000 pounds in the income statement , in addition to its
expenditure included an amount of L.E 35,000 as a provision for pension , and it has been made clear
that the company is authorized to establish a special fund with its special regulation . the total salaries
and wages included in the company expenses are L.E 160,000 Required:

Determine the taxable profit .

Amount
Accounting net income 25,000
Add
Allowed deductible cost =20% of total salaries =20% x
160,000 =32,000
The value of the increase in the provision for pension about 3,000
20% = (35,000 – 32,000)=3,000
Net taxable income 28,000

Tax Accounting
Chapter 03 12
 7-Private insurance premiums »♥
» Law 91 for 2005 stipulated on deducting insurance
premiums held by tax payer against disability or death
or for getting an amount , amount or revenue , these
premiums should not exceed L.E 3,000 in a year .
Noted that »Retrievable
» deposits are not considered as part of
deductible cost because the company will retrieve these
amounts , its considered an assets and shown the balance
sheet.

Illustration(01):
NOUR company included met income of 40,000 pounds , in addition to its expenses to its expenses
an amount of 11,000 L.E in premiums and it has been shown that this amount included the following:
- 4,500 life insurance premiums for partner .
- 1,500 insurance premiums for partner’s home.
- 5,000 retrievable deposits for a bid .

Determine the taxable profit

Amount
Accounting net income 40,000
Add
- Excess value of life insurance for partner 1,500
(4,500-3,000) =1,500
- Insurance premiums for partner’s home not 1,500
deductible
- Retrievable insurance (not deductible ) 5,000
Taxable net income 48,000

Tax Accounting
Chapter 03 13
8- Donations First: Donation paid to the governmental units , local administrative units and other
public units are like Bank Nasser are deductible regardless of the amount paid.
Second: Donations and contributions paid to Egyptian non-government are
not deductible organizations and social establishments , these donations and
contributions must not exceed 10% of the taxable income to allowed as tax
deductible should follow these conditions:

A-Donations must be actually paid.

B-Donations should be paid to Egyptian chartable entities which registered in
accordance with the provisions regulating them.
Third: Donations to individuals like poor people or entities are not subject to
government supervision are not deductible.

Illustration Page (111)

AHMED company included a net income of 500,000 pounds , in addition expenses of 115,000 as donations
and subsidies included the following:
•5,000 donated to Nasser social bank
•25,000 donated to Egyptian governmental hospitals.
•15,000 donations to one of the existing governmental hospital outside Egypt .
•35,000 donations the company promised to pay over the next year as contribution to a charity event will
be hosted by one the Egyptian registered charity institutions
•13,000 donations to an Egyptian political party as a contribution in its election campaign of the party.
•22,000 donations paid to an Egyptian registered charity institution.

Required :
Determine the taxable profit .
Answer
Amount
Accounting 500,000
Add;
Donation to Nasser social bank ( allowed to deduct) -------
Donation to Egyptian governmental hospital (allowed to deduct) -------
Donation to one of the existing government hospital outside Egypt (not deductible) 15,000
Donation to company promised to pay over the next year as contribution to a charity event
will be hosted by one the Egyptian registered charity institutions .(not actually paid)(not
deductible)
35,000
Donation to an Egyptian political party as a contribution in its election campaign of the party. 13,000
(not deductible)

Donation to an Egyptian registered charity institution (add temporary) not exceed 10% of 22,000
taxable net income.
Net profit 585,000
Deduct
Donation to an Egyptian registered charity institution (22,000)
(10% x 585,000 )= 53,182 or 22,000 (whichever is lower)
Taxable net income
Tax Accounting
Chapter 03 14
 9- Penalties and indemnification »♥
» To treat financial penalties as deductible
costs the following conditions must be met:

A) It is not related to violating tax law provisions

so tax payer cannot benefit from his crime such
as a pricing offense fine commercial fraud.

B) It must be related to activities of the

company for example damage fines caused by
a company’s car.

C) It must be a result of a revenue transaction

Illustration Page (115)
SHAHD company included a net loss of 30,000 in addition included within its expenses 5,000 as
penalties and indemnification as follows:
•It is not include within the penalties and indemnification an amount of L.E 2,500 fine because of
submission delay of tax return for the last year within the legal time limit .
•It includes LE 2,000 of ground fees in Suez port as a result of delay in the clearance of one of the
cars imported for the company.
•It includes 3,000 delay penalties due to supplying goods to one of the companies on time as
agreed upon .
•It is not included within the penalties an item of 1,500 fine for failure to comply with the
requirements of the civil defense.
Required: Determine the taxable profit.

Accounting net income (3,000)

Add
Ground fees in Suez port as it is considered as capital 2,000
expenditure (not allow deductible ) because it does not
result from a revenue transaction
The cost of delay fine allowed by law (no adjustment ) -------
Deduct
Fine because of the delay for the submission of tax return -------
because they are related to violating the tax law
(no adjustment )
Fine for failure to comply with the requirement of the 1,500
requirement of the civil defense ( not included within the
penalties ) then deducted

Taxable net income 29500

Tax Accounting
Chapter 03 15
 10- Bad debts »♥Bad
» debt expense to be deductible must be fulfillment of the
following conditions:
1- Existence of regular accounts within the entity .
2- The debts is related to the activity of taxpayer.
3- The debts is recorded in entity accounts.
4- The entity must have taken serious procedures for collecting the debt
and has been unable to collect it After eighteen months of maturity date .

Illustration Page (119)

SHADY company included a net income of 60,000 pounds in income statement in addition to this
included its expenses amount of 15,000 as bad debt as follows:
•8,000 as a bad debt because of a bankruptcy of one of the debtors after 12 months of maturity of
the debt and his disability to pay the full amount , a lawsuit field filed by the company to claim the
amount is still in circulation before the courts .
•7,000 bad debt because of the death of one of the debtors whose debt amount shows in the
company’s records and showing the regularity of an amount of 10,000. then found that the legacy
of the debtor is enough only to pay 30% of his debt , the company has filed a lawsuit to the heirs of
the debtor to claim debt and got a trial judgment to collect these amount , was issued 13 months
after the death of the debtor note that debt arose due to the sale of goods to the debtor before his
death six months .
Required: Determine taxable profit .

Accounting net income 60,000

Add;
Bad debt due to the bankruptcy of the debtor because
18 months at least should pass after the maturity date 8,000
(not allowed)
Bad debt because of the death of the debtor due to the -------
availability of all conditions to be included in deductible
costs and expenses , including the passage at least 18
months from the debt before the death of the debtor an
13 months after the death of the debtor until the date of
court (allowed to deduct)
Taxable net income 68,000

Tax Accounting
Chapter 03 16
Second group
Deductible costs and expenses not stated by the law
1- Wages and salaries There are some types of wages and salaries paid by the company
A) Wages and salaries of the company employees:
»One
» of the deductible costs and expense whether that were daily
weekly semi- monthly.

B) The salaries of tax payer’s relatives:

»Salaries
» paid to relatives are deductible expenses with the
following conditions

»Wages
» and salaries paid to relatives for actual working the
company if turns out that the work is not real it is re – added to
the tax base.

»Wages
» and salaries paid to relatives within the reasonable limits
of equals if turns out that they are overpaid only equals’ wages
are included in costs and deductible expenses and any increase
added to the tax base.

»wages
» and salaries have been paid already.

C) The salaries of General partners

♥ Salaries paid to General partner in partnership is not deductible
expense since the general partner is the managing partner as he
contributed by his capital and his work and what he gets from the
company is a return for both of them.

D) The salary of the limited partner

Limited partner shall not be allowed to perform any act of
administration but the limited partner can perform internal work and
get salary sol salaries paid to limited partners is deducible cost.

E) Salaries paid to one of the partners in exchange for waiving all or

part of his share in the enterprise:
These salaries is not deductible cost because they do not represent
salaries paid for work.
F) Capitalized salaries:
»♥
» Wages and salaries of engineers, workers that is related to
manufacture, installation, preparation or processing of fixed
assets are not deductible expense as they are added to capital
value of these assets and depreciated with these assets.

G) The salaries of absent workers who are called up for military

service:
»♥
» These salaries are deductible costs as long as the employment
contracts are still.
Tax Accounting
Chapter 03 17
Illustration Page (123)
HASSAN company included a net income of 110,000 pounds in the income statement during the
year 2014, in addition to this included within its expenditures amount of 66,000 L.E in salaries and
wages, it has been shown that this amount includes the following:
•8,000 pounds salaries of engineers assigned to install a new machine.
•3,000 pounds annual salary of partner ALY ( limited partner).
•10,000 pounds annual salary of partner KHALED, noted that the equal’s salary is 500 pounds/
month.
•5,000 pounds salary of the employees who have been called up for military service, noted that
the company has retained the written contracts with these workers when they return from military
service.
Required: Determine the taxable profit.

Accounting net income 110,000

Add;
Salaries of engineers to install a new machine (not allowed to 8,000
deduct)
Worker’s loan (not allowed to deduct) 12,000
Limited partner ALY salary is deductible cost (not adjust)
Increase in the value of the salary pid to partner relative 4,000
= 10,000 – (500 x 12) = 4,000
Salaries of employees who have been called for military
(not adjust)
Taxable net income 134,000

Tax Accounting
Chapter 03 18
 2- Advertising expense »♥
» Advertising expenses have three cases
First: Periodical promotional publicity expense:
»Company
» may distribute agendas calendars pens and bags
which bears the name of the entity or its logo or brand
periodically in order to promote it these expenses are
considered deductible expense

Second: Advertising Campaigns:

»These
» expenses are spent with the aim of presenting a new
product in the market
»Advertising
» campaigns is distributed over a period from 3 to 5
years and with deduct for respect to current year only.

Third: Fixed posters

»The
» company may own fixed wooden or metal billboards in the
roads these considered fixed assets depreciation of this fixed
assets shall be included in the deductible costs and expenses
which is calculated on a 25% by depreciation base.
Illustration Page (127)
SHADY company included a net income of 130,000 pounds in the income statement during the
year 2014, also the company included in the expenditures 65,000 pounds expense for advertising,
it has been shown that this amount includes the following:
•25,000 pounds, the value of and advertising campaign from the beginning of the year for a new
product for the company.
•7,000 pounds for agendas, calendar bearing the name of the company and distributed annually
on the occasion of the start of the new year.
•20,000 pounds value of fixed billboards in the roads and fields from the beginning of the year and
its depreciation was not recorded, note that the rate of annual depreciation of 25%.
•13,000 pounds maintenance expense for fixed billboards .
Required: Determine to the taxable profit.

Accounting net income 130,000

Add;
Increase in the value of the advertising campaign for a new product 20,000
of the company are considered expenses deferred revenue so must
distributed from 3 to 5 years
25,000 / 3 = 5,000 pounds
Increase in advertising campaign value = 265,000 – 5,000 = 20,000
Value of fixed billboards are a part of fixed assets ( not allowed to 20,000
deduct)
Maintenance expenses for fixed billboards (allowed to deduct, no
adjust)
Deduct
Tax depreciation for fixed billboards = 20,000 x 25% = 5,000 5,000
Taxable net income 165,000
Tax Accounting
Chapter 03 19
 3- Rent Expense: »Real
» estate means all the places that the juridical persons use to
carry out its operations of production and administrative work.

First: Real estate leased from a third party:

»If
» real estate is owned by others and company operates based on a
lease contract it should be noted here as follows:

1) The tax law allows to deduct the rent of this year and not allowed to
deduct the rent due for prior periods or rent paid in advance.
2) It is not allowed to deduct any insurance deposited with the lease where
they do not represent the expense but these amounts to be recovered at
the end of the Lease.
3) It is not allowed to deduct any other expense related to properties
leased from a third party such as maintenance expense repairs because
the property is not owned by the company.

4) The tax law does not allow deducting the value of private rental
accommodation for property owners

5) It is not allowed to deduct any expenses of a capital nature related to

prosperities leased from a third party
6) If the entity leased part of the building – which is related – to others the
total rent paid is deductible within the costs and expenses and the rent
received to be considered as revenue with the tax base. but the law allows
to deduct expenses related to the property such as maintenance

Second: Real estate owned by the company:

»♥
» Not allowed to deduct any rent on properties owned by the
company where it carries out its activities

Illustration Page (132)

MOHAMED ALY company included a net income of 200,000 pounds in the income statement
during the year 2014, also the company leases a property and included in expenses of the income
statement 60,000 pounds a rent of the property has been shown as follow:
•Lease contract states paying rental value of the first four months of next year, with monthly rental
of the property in accordance with the lease 3,000 pounds.
•10,000 pounds deposit as rent insurance to property owner.
•5,000 pounds property maintenance expenses that leased the company from a third party.
•The company leases part of the property for a monthly rent of 1,000 pounds, was not included as
income in income statement.
Required: Determine taxable profit.

Tax Accounting
Chapter 03 20
Accounting net income 200,000
Add;
Rent paid in advance (not allow to deduct) 3,000 x 4 months 12,000
= 12,000 pounds
Property maintenance expense (not allow to deduct) 5,000
Rent received for leasing part of property since it is considered 12,000
a revenue = 1,000 x 12 months
Taxable net income 239,000

Tax Accounting
Chapter 03 21
4- Tips or gratuities expenses »The
» amounts are paid by the company for others to
facilitate the performance of its business whether in the
form of a cash or free products from the company.
»Tips
» in many cases are not supported by documents so
they raise a lot of problems so it is allowed to deduct tips if
the following conditions are met:
»Be
» linked to company’s activities.
»Expenses
» not supported by documents including tips shall
not exceed to 7% of the total general and administrative
expenses.

»» Commissions paid to employees of the company these

commissions are treated as wages and salaries considered
deductible cost.
5- Commissions expenses
»Commissions
» paid to general partner these commissions
are not considered deductible costs.
»Commissions
» paid to limited partner these commissions
are deductible costs
»Commissions
» paid to persons and entities have commercial
register are considered deductible cost.

6- Maintenance Expenses »The

» maintenance expenses are included within costs and
expenses deductible giving the following conditions:
»Maintenance
» is to be conducted to asset which owned by
the company.
»The
» company is obliged to pay maintenance expenses,
if the company volunteer to bear the costs of maintain
a new car during the warranty period and the contract
for the purchase of the car provides that the seller should
bear these costs, then these expenses are not considered
deductible costs.

7- Travel and moving expense: »Travel

» and moving expenses of the company’s owners are
considered within the costs deductible upon the following
conditions:
»Travel
» expenses must be documented.
»Travel
» expense must be real and related to business and
not for personal purpose.
»Travel
» expenses should be reasonable.

8- Incorporation expenses: »The

» incorporation expenses is all amounts that spent by
the property on its formation such as: expenses of editing,
recording
»It
» is treated as deferred expenses that does not belong
to the year in which they were spent, so the incorporation
expenses is distributed over a period from 3 to 5 years.
9- Carrying forward losses: »it
» shall be carried forward annually to the following five
years, after which none of the loss shall be carried forward
to any other year.

Tax Accounting
Chapter 03 22
Illustration Page (140)
The financial result of AHMED’s company during the years from 2007 to the year 2013 as follows:

Required: Determine the tax calculations for loss in 2007.

Illustration Page (140)

The approved loss to one investor for year 2005 equals 120,000 L.E. if the tax authority approved
the following results during the next seven years 22,000L.E. Profit 20,000 L.E. Losses, 38,000 L.E.
Profit 35,000 L.E. profit 30,000 L.E. Profit 7,000 L.E. profit 5,000 L.E. Profit.
Required: Determine the adjusted taxable net income for each.

Tax Accounting
Chapter 03 23
T hird Group
Items that are not considered deductible costs and expenses
1- Reserves mad allowances of different types.
2- The income tax payable under this Act and it has already addressed this item when treating fees
and taxes incurred by the entity.
3- Outstanding return on loans beyond twice the price of credit and debit declared at the Central
Bank at the beginning of the calendar year.
4- Returns of loans and debt of different types paid to natural persons not subject to tax.

Fourth Group
Items considered deductible for some juridical persons and not deductible for others
»This
» group includes the reserve and allowances in banks and insurance companies that is
not considered from deductible costs but, as an exception case, reserve formed by banks
and insurance companies are among the costs and deductible expenses given the following
conditions:
A) Reserve should be recorded in the firm’s financial records.
B) Reserves must be used for its original purpose.
C) Reserves formed during the year determined in accordance with standards issued by the
Central bank on the preparation of the financial statements and holds 80% within deductible costs.

Illustration 2 Page (81)

ALY company showed the following values for items of machinery, equipment and devices by the
books and records in 1/1/2016:

- In 11/5/2016 35,000 L.E worth of mechanical machinery and equipment has been used for the first
time which was under development and installation until the beginning of 2016 and it was included
within the costs of projects under implementation.

- In 20/6/2016 supplemental machinery and equipment was purchased costing L.E 20,000
equipment .
Required: Determine the depreciation basis in the following cases:

»First
» case: in 10/9/2016 electric machinery and equipment was sold for L.E 100,000.
»Second
» Case: in 10/9/2016 electric machinery and equipment was sold for L.E 550,000.
»Third
» case: in 10/9/2016 electric machinery and equipment was sold for L.E 395,000.

Tax Accounting
Chapter 03 24
Tax Accounting
Chapter 03 25