Capital Allowances Simplified - Part 1

Tax Education Series - Episode 5

Written by Richard Okunola

Capital allowance is a form of relief granted to any company that has incurred a qualifying capital expenditure (QCE) during a particular basis period. Take note that this QCE is subject to a review by the revenue authority.

Capital allowance is governed by the second schedule of the Company Income Tax Act (CITA).

It is generally believed that capital allowance is granted in lieu of depreciation. Yes, this is because under the tax law, depreciation is NOT allowed as an expense and in most cases depreciation would have been deducted from the accounting profit of companies prior to when income tax is being computed. For this reason capital allowance appears as a form of relief to reduce the impact of the depreciation disallowed by the tax authority.

Types of capital allowance

There are three main types of capital allowance namely:

1. Initial allowance

This is granted only in the first year of acquiring/purchasing an asset, whether it is purchased new or second-hand (except for building which has a special treatment). The initial allowance is usually granted in full irrespective of the number of month in the basis period. It is granted once in the lifetime of an asset.

2. Annual allowance

This is granted annually on the qualifying capital expenditure over the useful life of the asset. It is computed as a percentage, after the deduction of initial allowance claim on the cost of QCE.

E.g If a company bought an asset for N10,000 and the initial allowance is 10%, the remainder would be N9,000 (N10,000 - (N10,000 × 10%)). Hence, this balance is prorated over the useful life of the asset.

3. Investment allowance

Generally, investment allowance is granted to encourage businesses or companies that made capital investments in certain sectors.

This is in two categories;

a. Investment allowance on plant & machineries.

b. Rural Investment allowance.

To be continued in part 2....

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