How to Calculate Initial Allowance in Nigeria

Initial allowance in Nigeria is a deduction from a company’s assessable profits. It allows companies to spread the tax relief for qualifying capital expenditure (QCE) over several years. Unlike depreciation expense, capital allowance cannot be used to reduce taxable profits. Also, taxable profits, all other adjustments being equal, are calculated by adding net profits to depreciation and subtracting capital allowance.  However, a taxpayer must fulfill four (4) conditions to claim capital allowance as the tax relief is not automatic:

Conditions for claiming initial allowance

  1. The taxpayer making the claim must own the qualifying capital expenditure.
  2. The company must have incurred qualifying capital expenditure.
  3. The taxpayer making the claim has to be the beneficial owner of the asset at the end of the stipulated period.
  4. “The asset must be in use wholly, reasonably, exclusively and necessarily for the company at the end of its basic period. The taxpayer must get an acceptance certificate from the Inspectorate Division of the Federal Ministry of Industry for any QCE of NGN 5,000,000 and above. (Business Facilitation Act 2023)”

How to calculate capital allowance in Nigeria

Question 1:

In January 2024, Company Zee bought plant and machinery for NGN 5,000,000. Accounting year ends on 31 December. Calculate the capital allowance.

Capital allowance rates:

  • Investment allowance: 10%
  • Initial allowance: 50%
  • Annual allowance: 25%

Using the provided formulae:

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

CONCLUSION

An initial allowance should be computed by a qualified Chartered Accountant as it involves several computations that can be confusing to a novice. For accurate computation, it’s advisable to consult a qualified Chartered Accountant. The rates for Capital Allowances can typically be found in relevant tax regulations or guidelines provided by the tax authority.

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