Which business debts can you deduct from zakat?
Debts due within a year are deducted; interest isn’t, and provisions only once they’re paid. The big difference is loans for equipment.
Deducting debts is where business zakat calculations differ most, between methods and between scholars. Here is what AAOIFI and NZF say, and where they part ways.
The rule: debts due within a year
Both methods deduct debts the business has to pay within the coming year, because that money isn’t really free for the owner. AAOIFI deducts liabilities payable during the financial year and the instalments of long-term debts falling due in the coming period (2/1/1). NZF draws the line at 12 lunar months.
- Suppliers you owe (6/3/2).
- Taxes that are due: VAT, payroll tax, corporate tax (6/3/10).
- Accrued wages, rent and bills (6/3/8).
- Payments received for goods or work you haven’t delivered yet (6/3/9).
- Short-term loans, overdrafts and credit cards (6/3/7).
- The next 12 months of repayments on long-term loans.
What isn’t deducted
- Interest, paid or owed (AAOIFI 6/2/4). NZF deducts only the part of a repayment that isn’t interest.
- Provisions for holiday pay, warranties, pensions or claims, until they are actually paid (7/2–7/3).
- The part of a long-term loan due after the next 12 months.
- Capital, reserves and profit, which belong to the owners (6/1).
Debts that paid for equipment
This is where AAOIFI and NZF differ. AAOIFI looks at what the money paid for. A loan that bought an oven, a van or a building financed an asset that doesn’t count for zakat, so the loan isn’t deducted either (6/2/2). A loan that paid for both kinds of assets is deducted pro rata, by the share of the business’s assets that counts for zakat (6/2/3).
NZF doesn’t make this distinction: the coming year’s repayments are deducted whatever the loan paid for.
| AAOIFI | NZF | |
|---|---|---|
| Deducted | 0 | 3,600 |
| Why | It paid for equipment, which doesn’t count (6/2/2) | Next year’s repayment of a business debt |
Deduct only what you need to?
NZF adds a word of caution: deduct what is due now, and debts due within the next 12 months only if paying them would stop you paying the zakat. Many Shafi’i scholars go further and hold that debts don’t reduce zakat at all. If you follow that view, you can switch deductions off completely in the app.
How the app handles it
Each liability account in your trial balance is sorted into a category: suppliers, taxes, short-term debts, loans, provisions or interest. For long-term loans you enter the repayment due in the next 12 months and what the loan paid for: stock and day-to-day costs, equipment, or both. The method page lists every rule.