If you are a business owner or have a registered company in Nigeria, the Companies Income Tax Act mandates that you pay tax. Fortunately, there exists a tax relief known as capital allowance which allows taxpayers to enjoy lawful reductions when they incur capital expenditure on tangible non-current assets used in generating taxable profits, in lieu of accounting depreciation. In this article, we’ll discuss what capital allowance entails and provide illustrations to explain how to calculate capital allowance in taxation in Nigeria.
How to calculate capital allowance in taxation in Nigeria would be discussed below:
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What is Capital Allowance in Taxation in Nigeria?
Capital allowance is a tax relief within the ambit of the Companies Income Tax Act which is granted on tangible non-current in generating taxable profits, in place of accounting depreciation. However, capital allowance does not apply to assets exclusively used to generate tax-exempt profits for companies in Nigeria. And when qualifying assets are partially utilised for generating profits, the capital allowance will be prorated.
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What are the Conditions for Claim Capital Allowance in Nigeria?
There are some conditions a taxpayer in Nigeria must meet to claim capital allowance. The conditions for granting capital allowance in Nigeria are:
- The asset must be owned by the claimant;
- The capital expenditure must be incurred on the asset concerned;
- The asset must be in use at the end of the basis period;
- A claim must be made by the taxpayer before it is granted;
- A certificate of acceptance must be obtained from the Inspectorate Division of the Federal Ministry of Industry
- What are the Types of Capital Allowances in Nigeria?
Initial allowance is granted in the first year of purchase and when the asset is first used for the company’s business. This type of capital allowance cannot be prorated and is granted once in the life of an asset. If the taxpayer purchased the asset second hand, or even third hand, an initial allowance can be granted on an asset but not to a purchaser of a building in respect of which an initial allowance had once been given.
Annual allowance is the second type of capital allowance within the ambit of the Companies Income Tax Act which is granted every year that the asset is in use by the taxpayer until the asset is fully written off. Unlike initial allowance, annual allowance is prorated according to the basis period (that is if the basis period is less than 12 months). In the case of private use, an annual allowance can be prorated on the portion of months the asset is used in business.
Investment allowance is an additional allowance that is granted at the rate of 10% to companies in Nigeria that incur expenditure on plant and equipment.
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How to Calculate Capital Allowance in Taxation in Nigeria
To calculate capital allowance on qualifying capital expenditure in Nigeria, all taxpayers must use the same rate contained in Schedule II of the Companies Income Tax Act 2004. Schedule II of CITA contains rates for initial allowance and annual allowance. See the table containing the rates below:
| Qualifying Expenditure | Initial Allowance (%) | Annual Allowance (%) |
| Building ( industrial & non-industrial) | 15 | 10 |
| Mining | 95 | NIL |
| Plant and machinery for Agricultural production | 95 | NIL |
| Plant and machinery for other purposes aside from agricultural production | 50 | 25 |
| Furniture & fittings | 25 | 20 |
| Motor vehicle for public transportation | 95 | NIL |
| Motor vehicle for other purposes aside from public transportation | 50 | 25 |
| Plantation equipment | 95 | NIL |
| Housing estate | 50 | 25 |
| Ranching and plantation | 30 | 50 |
| Research & Development | 95 | NIL |
Below are the formulae for determining initial allowance, annual allowance, and investment allowance when calculating capital allowance in taxation in Nigeria:
- Initial allowance (IA) =
Initial allowance rate × cost of the asset
- Annual allowance (AA) = Annual allowance rate × (Cost of the asset minus initial allowance)
- Investment allowance = 10% × cost of asset
According to the provisions of the CITA, the maximum capital allowance that a taxpayer can claim is two-thirds of assessable profits. The exception to this rule is for companies in either the agro‐allied or manufacturing industries. In other words, a company in the agro-allied or manufacturing industry can claim its entire capital allowance.
In addition to the above table containing qualifying assets and their applicable capital allowance rate, the Companies Income Tax Act also grants rural investment tax relief to businesses on infrastructure costs incurred if located not less than 20km from certain facilities. These are the facilities and their applicable rates:
| No facilities at all | 100% |
| No electricity | 50% |
| No water | 30% |
| No tarred (paved) road | 15% |
- Illustrations on How to Calculate Capital Allowance in Taxation in Nigeria
In this section, we’ll be using three illustrations to calculate capital allowance in taxation in Nigeria.
Illustration 1
In January 2022, Prudent & Sons purchased plant and machinery for NGN15,000,000. The accounting year ends on December 2022. Calculate the capital allowance.
Solution:
According to the Companies Income Tax Act, the capital allowance rate for addition to plant and machinery are as follows:
10% – investment allowance
50% – initial allowance
25% – annual allowance
Investment allowance = NGN15,000,000 × 10% = NGN1,500,000
Initial allowance = NGN15,000,000 × 50% = NGN7,500,000
Annual allowance = NGN(15,000,000 – 7,500,000) × 25% = NGN1,875,000
Total capital allowance = NGN (1,500,000 + 7,500,000 + 1,875,000) = NGN10,875,000
Illustration 2
Carseal Logistics bought furniture and fittings for their Lagos office in April 2021 at the cost of N10,000,000. Accounting years ends on 31 December. Calculate the capital allowance.
Solution:
The capital allowance rates for addition to furniture and fittings are
25% – initial allowance
20% – annual allowance
Therefore:
Initial allowance (IA) = NGN 10,000,000 * 25% = NGN 2,500,000
Annual allowance (AA) = NGN (10,000,000 – 2,500,000) * (9 / 12) * 20% = NGN 1,125,000
Total capital allowance = NGN (2,500,000 + 1,125,000) = NGN 3,625,000
Note that the annual allowance for Carseal Logistics was prorated for 2021. That is, from April to December 2021 is nine (9) months.
Illustration 3
In the 2020 tax year, ABC & Sons recorded NGN4,800,000 as an assessable profit and capital allowance of NGN5,600,000. What amount of relief can ABC & Sons claim?
Solution:
ABC & Sons can only claim two-thirds of its accessible profit because NGN5,600,000, which is the amount of capital allowance calculated in the 2020 tax year, is greater than the accessible profit of NGN4,800,000. In light of this, NGN3,200,000 which is two-thirds of NGN4,800,000 (the accessible profit) is what ABC & Sons can claim.
The remaining balance of ABC & Sons’ capital allowance for the 2020 tax year of NGN2,400,000 (i.e. NGN5,600,000 – NGN3,200,000) will be carried forward to the next year. But if ABC & Sons were to be a manufacturing or agro-allied company, it can claim the entire capital allowance of NGN5,600,000.