How to Calculate Capital Allowance in Taxation in Nigeria

How to Calculate Capital Allowance in Taxation in Nigeria

Capital allowances  can be compared to an expense that can be deducted from taxes and
are accessible for eligible capital expenses spent on acquiring specific assets used for business trade or rental purposes.

Many business owners have intentionally refused to pay their taxes as they do not feel or see the effect of taxes being paid on their well-being and that of their businesses. This is a relatable issue that seeks more tax payers engagement by the taxing authorities/administrators.

Despite this reluctance by taxpayers to pay taxes, there are tax reliefs that business owners and companies can surely benefit from. Truth is, Ignorance of these tax reliefs has dealt a heavy blow on the finances of companies. Surely, tax laws recognizes the investment by companies, and allows for lawful reductions- i.e Capital Allowance within the ambit of the Companies Income Tax Act.

How to Calculate Capital Allowance in Taxation in Nigeria

We will now consider three (3) instances on how to calculate capital allowance in Nigeria.

Question 1:

In January 2018, Company Bee acquired plant and machinery for NGN 5,000,000. The fiscal year concludes on 31 December. Determine the capital allowance.

Solution 1:

The capital allowance rates for additions to plant and machinery are as follows:

10% – for investment allowance

50% – for initial allowance

25% – for annual allowance

Please take note of the following:

Initial allowance (IA) equals Cost of asset multiplied by IA rate.

Annual allowance (AA) equals Cost of an asset minus initial allowance, then multiplied by AA rate.

Investment allowance equals Cost of asset multiplied by Investment allowance rate.

Investment allowance = NGN 5,000,000 * 10% = NGN 500,000

Initial allowance = NGN 5,000,000 * 50% = NGN 2,500,000

Annual allowance = NGN (5,000,000 – 2,500,000) * 25% = NGN 625,000

Total capital allowance = NGN (500,000 + 2,500,000 + 625,000) = NGN 3,625,000

Comments:

A taxpayer can avail initial allowance and investment allowance only once during the useful life of a plant and machinery. However, investment allowance does not decrease the asset’s cost for calculating the annual allowance, whereas initial allowance reduces the asset’s cost.

Question 2:

In April 2018, Company Bee purchased furniture and fittings for NGN 1,000,000. The fiscal year concludes on 31 December. Determine the capital allowance.

Solution 2:

The capital allowance rates for additions to furniture and fittings are as follows:

25% – for initial allowance

20% – for annual allowance

Thus,

Initial allowance (IA) = NGN 1,000,000 * 25% = NGN 250,000

Annual allowance (AA) = NGN (1,000,000 – 250,000) * (9 / 12) * 20% = NGN 112,500

Total capital allowance = NGN (250,000 + 112,500) = NGN 362,500

Comments:

The capital allowance rate for plant and machinery differs from that of furniture and fittings.

The annual allowance is prorated for the year. From April to December 2018 equals nine (9) months.

Question 3:

Company ABC operates as a construction company with assessable profit of NGN 4,800,000 and capital allowance of NGN 5,600,000 in the 2019 tax year. What relief can Company ABC claim?

Solution 3:

If the capital allowance calculated in any assessment year equals or surpasses the assessable profits, then the maximum claimable amount is capped at two-thirds (66 2/3%) of the assessable profit. Hence, Company ABC can claim a capital allowance of NGN 3,200,000 based on the two-thirds (2/3) restriction of assessable profit (NGN 4,800,000). The remainder of NGN 2,400,000 (5,600,000 – 3,200,000) will be carried forward to the subsequent tax year. However, companies in the agro‐allied industry or manufacturing can claim the entire capital allowance.

CONCLUSION:

Generally, capital allowances represent a means by which businesses can deduct eligible capital expenses from their taxes, particularly those incurred in acquiring specific assets for business or rental purposes. Despite many business owners’ reluctance to pay taxes due to a perceived lack of tangible benefits, tax relief measures such as capital allowances offer a huge financial advantage.

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