{"id":295680,"date":"2023-07-25T15:52:06","date_gmt":"2023-07-25T14:52:06","guid":{"rendered":"https:\/\/nigerianfinder.com\/?p=295680"},"modified":"2023-07-25T15:52:06","modified_gmt":"2023-07-25T14:52:06","slug":"how-to-calculate-capital-allowance-in-taxation-in-nigeria","status":"publish","type":"post","link":"https:\/\/nigerianfinder.com\/how-to-calculate-capital-allowance-in-taxation-in-nigeria\/","title":{"rendered":"How to Calculate Capital Allowance in Taxation in Nigeria"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">If you are a business owner or have a registered company in Nigeria, the Companies Income Tax Act mandates that you pay tax.\u00a0 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&#8217;ll discuss what capital allowance entails and provide illustrations to explain how to calculate capital allowance in taxation in Nigeria.\u00a0\u00a0<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-295681\" src=\"https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Capital-Allowance-in-Taxation-in-Nigeria.jpg\" alt=\"How to Calculate Capital Allowance in Taxation in Nigeria\" width=\"605\" height=\"406\" srcset=\"https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Capital-Allowance-in-Taxation-in-Nigeria.jpg 605w, https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Capital-Allowance-in-Taxation-in-Nigeria-596x400.jpg 596w, https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Capital-Allowance-in-Taxation-in-Nigeria-300x200.jpg 300w\" sizes=\"(max-width: 605px) 100vw, 605px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">How to calculate capital allowance in taxation in Nigeria would be discussed below:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h2><span style=\"font-weight: 400;\">What is Capital Allowance in Taxation in Nigeria?\u00a0<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h2><span style=\"font-weight: 400;\">What are the Conditions for Claim Capital Allowance in Nigeria?\u00a0<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">There are some conditions a taxpayer in Nigeria must meet to claim capital allowance. The conditions for granting capital allowance in Nigeria are:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The asset must be owned by the claimant;\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The capital expenditure must be incurred on the asset concerned;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The asset must be in use at the end of the basis period;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A claim must be made by the taxpayer before it is granted;\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A certificate of acceptance must be obtained from the Inspectorate Division\u00a0 of the Federal Ministry of Industry\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">What are the Types of Capital Allowances in Nigeria?\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Initial allowance is granted in the first year of purchase and when the asset is first used for the company&#8217;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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h2><span style=\"font-weight: 400;\">How to Calculate Capital Allowance in Taxation in Nigeria\u00a0<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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:\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<table>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">Qualifying Expenditure\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Initial Allowance (%)<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Annual Allowance (%)<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Building ( industrial &amp; non-industrial)\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">15<\/span><\/td>\n<td><span style=\"font-weight: 400;\">10<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Mining\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">95<\/span><\/td>\n<td><span style=\"font-weight: 400;\">NIL<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Plant and machinery for Agricultural production\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">95<\/span><\/td>\n<td><span style=\"font-weight: 400;\">NIL<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Plant and machinery for other purposes aside from agricultural production\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">50<\/span><\/td>\n<td><span style=\"font-weight: 400;\">25<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Furniture &amp; fittings\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">25<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Motor vehicle for public transportation\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">95<\/span><\/td>\n<td><span style=\"font-weight: 400;\">NIL<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Motor vehicle for other purposes aside from public transportation<\/span><\/td>\n<td><span style=\"font-weight: 400;\">50<\/span><\/td>\n<td><span style=\"font-weight: 400;\">25<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Plantation equipment\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">95<\/span><\/td>\n<td><span style=\"font-weight: 400;\">NIL<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Housing estate<\/span><\/td>\n<td><span style=\"font-weight: 400;\">50<\/span><\/td>\n<td><span style=\"font-weight: 400;\">25<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Ranching and plantation\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">30<\/span><\/td>\n<td><span style=\"font-weight: 400;\">50<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Research &amp; Development\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">95<\/span><\/td>\n<td><span style=\"font-weight: 400;\">NIL<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400;\">Below are the formulae for determining initial allowance, annual allowance, and investment allowance when\u00a0 calculating capital allowance in taxation in Nigeria:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Initial allowance (IA) =\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Initial allowance rate \u00d7 cost of the asset<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Annual allowance (AA) =\u00a0 Annual allowance rate \u00d7 (Cost of the asset minus initial allowance)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Investment allowance = 10% \u00d7 cost of asset<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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\u2010allied or manufacturing industries. In other words, a company in the agro-allied or manufacturing industry can claim its entire capital allowance.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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:\u00a0<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">No facilities at all<\/span><\/td>\n<td><span style=\"font-weight: 400;\">100%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">No electricity<\/span><\/td>\n<td><span style=\"font-weight: 400;\">50%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">No water<\/span><\/td>\n<td><span style=\"font-weight: 400;\">30%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">No tarred (paved) road<\/span><\/td>\n<td><span style=\"font-weight: 400;\">15%<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Illustrations on How to Calculate Capital Allowance in Taxation in Nigeria\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In this section, we&#8217;ll be using three illustrations to calculate capital allowance in taxation in Nigeria.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Illustration 1<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In January 2022, Prudent &amp; Sons purchased plant and machinery for NGN15,000,000. The accounting year ends on December 2022. Calculate the capital allowance.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Solution:<\/span><span style=\"font-weight: 400;\">\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">According to the Companies Income Tax Act, the capital allowance rate for addition to plant and machinery are as follows:\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">10% &#8211; investment allowance\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">50% &#8211; initial allowance\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">25% &#8211; annual allowance\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investment allowance = NGN15,000,000 \u00d7 10% = NGN1,500,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Initial allowance = NGN15,000,000 \u00d7 50% = NGN7,500,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Annual allowance = NGN(15,000,000 &#8211; 7,500,000) \u00d7 25% = NGN1,875,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Total capital allowance = NGN (1,500,000 + 7,500,000 + 1,875,000) = NGN10,875,000<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Illustration 2<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Solution:\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The capital allowance rates for addition to furniture and fittings are<\/span><\/p>\n<p><span style=\"font-weight: 400;\">25% \u2013 initial allowance<\/span><\/p>\n<p><span style=\"font-weight: 400;\">20% \u2013 annual allowance<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Therefore:\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Initial allowance (IA) = NGN 10,000,000 * 25% = NGN 2,500,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Annual allowance (AA) = NGN (10,000,000 \u2013 2,500,000) * (9 \/ 12) * 20% = NGN 1,125,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Total capital allowance = NGN (2,500,000 + 1,125,000) = NGN 3,625,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Note that the annual allowance for Carseal Logistics was prorated for 2021. That is,\u00a0 from April to December 2021 is nine (9) months.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Illustration 3<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In the 2020 tax year, ABC &amp; Sons recorded NGN4,800,000 as an assessable profit and capital allowance of NGN5,600,000. What amount of relief can ABC &amp; Sons claim?\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Solution:<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">ABC &amp; 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 &amp; Sons can claim.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The remaining balance of ABC &amp; Sons&#8217; capital allowance for the 2020 tax year of NGN2,400,000 (i.e. NGN5,600,000 &#8211; NGN3,200,000) will be carried forward to the next year. But if ABC &amp; Sons were to be a manufacturing or agro-allied company, it can claim the entire capital allowance of NGN5,600,000.\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you are a business owner or have a registered company in Nigeria, the Companies Income Tax Act mandates that &#8230; <\/p>\n<p class=\"read-more-container\"><a title=\"How to Calculate Capital Allowance in Taxation in Nigeria\" class=\"read-more button\" href=\"https:\/\/nigerianfinder.com\/how-to-calculate-capital-allowance-in-taxation-in-nigeria\/#more-295680\" aria-label=\"More on How to Calculate Capital Allowance in Taxation in Nigeria\">Read more<\/a><\/p>\n","protected":false},"author":2534,"featured_media":295681,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3093],"tags":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Capital-Allowance-in-Taxation-in-Nigeria.jpg","jetpack_shortlink":"https:\/\/wp.me\/p6w1sx-1eV2","jetpack-related-posts":[],"_links":{"self":[{"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts\/295680"}],"collection":[{"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/users\/2534"}],"replies":[{"embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/comments?post=295680"}],"version-history":[{"count":1,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts\/295680\/revisions"}],"predecessor-version":[{"id":295682,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts\/295680\/revisions\/295682"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/media\/295681"}],"wp:attachment":[{"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/media?parent=295680"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/categories?post=295680"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/tags?post=295680"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}