Initial allowance is a tax relief that presents the opportunity for business owners and companies in Nigeria to reduce the tax burden imposed on their profits by the Companies Income Tax. In this article, we’ll be discussing what initial allowance is all about, including how eligible taxpayers can calculate initial allowance. In addition, we’ll also discuss other types of capital allowance, of which initial allowance is one of them, so you can get a clearer picture of the tax relief available to taxpayers within the ambit of the Companies Income Tax Act. 
How to calculate initial allowance in Nigeria would be discussed below:
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What is Initial Allowance in Nigeria?
Initial allowance is one of the major types of capital allowances of the lawful reductions available to taxpayers who incur capital expenditure on tangible non-current assets utilised in generating taxable profits. The Companies Income Tax Act allows for capital allowance to be used in lieu of accounting depreciation. Initial allowance, just like the other types of capital allowances, is not claimable when assets are exclusively used to generate tax-exempt profits.
According to the provisions of the Companies Income Tax Act, initial allowance is granted once to taxpayers in the first year of purchase of a qualifying capital asset and when the asset is first used for the company’s business. Initial allowance is still granted if the qualifying capital expenditure was purchased second-hand or even third-hand. However, when initial allowance has already been granted once on a building, it cannot be granted again if the building was purchased second-hand or third-hand.
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.
Unlike annual allowance (another major type of capital allowance in Nigeria), initial allowance cannot be prorated. To calculate initial allowance in taxation in Nigeria, the formula to use is;
Initial Allowance (AI) = Initial allowance rate × cost of the asset
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What are the Conditions to Fulfill to Claim Initial Allowance in Nigeria?
These are the conditions taxpayers must fulfill to claim the initial allowance in Nigeria:
- 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 Rates of Capital Allowance in Nigeria?
Schedule II of the Companies Income Tax Act contains the rates qualifying capital expenditure (QCE) and their applicable initial allowance (IA) and annual allowance rates. To calculate the initial allowance of a qualifying asset, you simply need to multiply the cost of the QCE with the applicable initial allowance rate contained in the table 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 |
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Illustrations of How to Calculate Initial Allowance in Nigeria
With the table above showing the initial allowance rates of qualifying capital expenditure, calculating initial allowance is easy using the formula below:
Initial Allowance (AI) = Initial allowance rate × cost of the asset
We’ll use two examples to illustrate how to calculate initial allowance in Nigeria.
Example 1
In January 2021, Toheeb & Sons purchased a building for its business operations for N15,000,000. The accounting year ends on December 2021. Calculate the initial allowance.
Solution
Initial Allowance (AI) = Initial allowance rate × cost of the asset
According to the Schedule II of the Companies Income Tax Act, the initial allowance for building is 15%.
Therefore, the initial allowance claimable by Toheeb & Sons for the purchase of an N15,000,000-worth building is calculated thus:
Initial allowance = N15,000,000 × 15%
= N2,250,000.
N2,250,000 is the initial allowance.
Example 2
Carseal Logistics bought furniture and fittings for their Lagos office in April 2021 at the cost of N1,000,000. Accounting years ends on 31 December. Calculate the initial allowance.
Solution
According to the Schedule II of the Companies Income Tax Act, the initial allowance for furniture and fittings is 25%.
Therefore, the initial allowance claimable by Toheeb & Sons for the purchase of furniture and fittings worth N1,000,000 is calculated thus:
Initial allowance (IA) = NGN 1,000,000 × 25% = NGN 250,000
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Other Important Information on Capital Allowance in Nigeria
As stated earlier, initial allowance is one of the types of capital allowance allowed as tax relief in lieu of accounting depreciation. The other types of capital allowances are annual allowances and investment allowances. An investment allowance is a one-time tax relief granted to taxpayers when they incur expenditures on plant and equipment. Investment allowance is granted at the rate of 10% of the cost of the plant and equipment. The annual allowance is calculated using the formula below:
Annual Allowance (AA) = Annual allowance rate × (Cost of the asset minus initial allowance).
It is also worthwhile to add that the Companies Income Tax Act provides that the maximum capital allowance that a taxpayer can claim is two-thirds of assessable profits. However, 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.