{"id":295686,"date":"2023-07-25T16:12:53","date_gmt":"2023-07-25T15:12:53","guid":{"rendered":"https:\/\/nigerianfinder.com\/?p=295686"},"modified":"2023-07-25T16:12:53","modified_gmt":"2023-07-25T15:12:53","slug":"how-to-calculate-initial-allowance-in-nigeria","status":"publish","type":"post","link":"https:\/\/nigerianfinder.com\/how-to-calculate-initial-allowance-in-nigeria\/","title":{"rendered":"How to Calculate Initial Allowance in Nigeria\u00a0\u00a0"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">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&#8217;ll be discussing what initial allowance is all about, including how eligible taxpayers can calculate initial allowance. In addition, we&#8217;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.\u00a0 <img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-295687\" src=\"https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Initial-Allowance-in-Nigeria-.jpg\" alt=\"How to Calculate Initial Allowance in Nigeria\u00a0\u00a0\" width=\"606\" height=\"403\" srcset=\"https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Initial-Allowance-in-Nigeria-.jpg 606w, https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Initial-Allowance-in-Nigeria--600x400.jpg 600w, https:\/\/nigerianfinder.com\/wp-content\/uploads\/2023\/07\/How-to-Calculate-Initial-Allowance-in-Nigeria--300x200.jpg 300w\" sizes=\"(max-width: 606px) 100vw, 606px\" \/><\/span><\/p>\n<p><span style=\"font-weight: 400;\">How to calculate initial allowance 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 Initial Allowance in Nigeria?\u00a0<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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&#8217;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.\u00a0\u00a0<\/span><\/p>\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;\">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;\u00a0\u00a0\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Initial Allowance (AI) = Initial allowance rate \u00d7 cost of the asset\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 to Fulfill to Claim Initial Allowance in Nigeria?<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These are the conditions taxpayers must fulfill to claim the initial allowance in Nigeria:\u00a0\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 Rates of Capital Allowance in Nigeria?<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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:\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>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h2><span style=\"font-weight: 400;\">Illustrations of How to Calculate Initial Allowance in Nigeria<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">With the table above showing the initial allowance rates of qualifying capital expenditure, calculating initial allowance is easy using the formula below:\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Initial Allowance (AI) = Initial allowance rate \u00d7 cost of the asset<\/span><\/p>\n<p><span style=\"font-weight: 400;\">We&#8217;ll use two examples to illustrate how to calculate initial allowance in Nigeria.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Example 1\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In January 2021, Toheeb &amp; Sons purchased a building for its business operations for N15,000,000. The accounting year ends on December 2021. Calculate the initial 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;\">Initial Allowance (AI) = Initial allowance rate \u00d7 cost of the asset<\/span><\/p>\n<p><span style=\"font-weight: 400;\">According to the Schedule II of the Companies Income Tax Act, the initial allowance for building is 15%.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Therefore, the initial allowance claimable by Toheeb &amp; Sons for the purchase of an N15,000,000-worth building is calculated thus:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Initial allowance = N15,000,000 \u00d7 15%<\/span><\/p>\n<p><span style=\"font-weight: 400;\">= N2,250,000.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">N2,250,000 is the initial allowance.\u00a0\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Example 2\u00a0<\/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 N1,000,000. Accounting years ends on 31 December. Calculate the initial allowance.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Solution<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">According to the Schedule II of the Companies Income Tax Act, the initial allowance for furniture and fittings is 25%.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Therefore, the initial allowance claimable by Toheeb &amp; Sons for the purchase of furniture and fittings worth\u00a0 N1,000,000 is calculated thus:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Initial allowance (IA) = NGN 1,000,000 \u00d7 25% = NGN 250,000<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h2><span style=\"font-weight: 400;\">Other Important Information on Capital Allowance in Nigeria\u00a0<\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.\u00a0 The annual allowance is calculated using the formula below:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Annual Allowance (AA) =\u00a0 Annual allowance rate \u00d7 (Cost of the asset minus initial allowance).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\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>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Initial allowance is a tax relief that presents the opportunity for business owners and companies in Nigeria to reduce the &#8230; <\/p>\n<p class=\"read-more-container\"><a title=\"How to Calculate Initial Allowance in Nigeria\u00a0\u00a0\" class=\"read-more button\" href=\"https:\/\/nigerianfinder.com\/how-to-calculate-initial-allowance-in-nigeria\/#more-295686\" aria-label=\"More on How to Calculate Initial Allowance in Nigeria\u00a0\u00a0\">Read more<\/a><\/p>\n","protected":false},"author":2534,"featured_media":295687,"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-Initial-Allowance-in-Nigeria-.jpg","jetpack_shortlink":"https:\/\/wp.me\/p6w1sx-1eV8","jetpack-related-posts":[],"_links":{"self":[{"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts\/295686"}],"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=295686"}],"version-history":[{"count":1,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts\/295686\/revisions"}],"predecessor-version":[{"id":295688,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/posts\/295686\/revisions\/295688"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/media\/295687"}],"wp:attachment":[{"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/media?parent=295686"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/categories?post=295686"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/nigerianfinder.com\/wp-json\/wp\/v2\/tags?post=295686"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}