Are you a Nigerian and you are curious about how to calculate capital allowance in taxation?
You have come to the right place, as in this article, we will be looking at how to calculate capital
allowance in taxation in Nigeria and several things you need to know related to this topic, but
first let’s understand what capital allowance is.
What is a capital allowance?
A capital allowance is a deduction that businesses can claim on the cost of certain capital
assets, such as plants, machinery, and buildings. It is a way for the government to
encourage businesses to invest in long-term assets that will help them grow and create jobs.
Capital assets are assets that are used in the business for more than one year. They can be
tangible assets, such as machinery and plants, or intangible assets, such as patents and
copyrights.
The amount of capital allowance that can be claimed for an asset is determined by its type
and age. The rates of capital allowance in Nigeria are set by the Companies Income Tax Act
(CITA).
For plant and machinery, the rate of capital allowance is 20%. This means that a business
can claim a deduction of 20% of the cost of the plant and machinery in the year in which it is
purchased. The capital allowance can also be claimed in subsequent years, over the useful
life of the asset.
For buildings, the rate of capital allowance is 4%. This means that a business can claim a
deduction of 4% of the cost of the building in the year in which it is purchased. The capital
allowance can also be claimed in subsequent years, over the useful life of the asset.
The capital allowance can be claimed in the year in which the asset is purchased or in
subsequent years. The amount of capital allowance that can be claimed each year is
calculated using the straight-line method. This means that an equal amount of capital
allowance is claimed each year over the life of the asset.
For example, if a business purchases a piece of machinery for N10 million and the useful life
of the machinery is 5 years, it can claim a capital allowance of N2 million each year for the
next 5 years.
The maximum amount of capital allowance that can be claimed in any year is two-thirds of
the assessable profits. This means that if a company’s profits are N10 million, the maximum
amount of capital allowance that they can claim is N6.67 million.
Restrictions on the amount of capital allowance that can be
claimed
There are a few restrictions on the amount of capital allowance that can be claimed. These
include:
1. A capital allowance cannot be claimed on assets that are used for personal purposes.
2. A capital allowance cannot be claimed on assets that are leased or rented.
3. A capital allowance cannot be claimed on assets that are acquired from a related party.
Note
1. A capital allowance is a valuable tax deduction that can help businesses reduce their tax
liability. However, it is important to understand the rules and restrictions that apply to the
capital allowance in Nigeria in order to claim the maximum deduction possible.
1.The capital allowance rates are subject to change, so it is important to check the latest
rates before claiming any deduction.
2. The calculation of the capital allowance can be complex, so it is advisable to seek
professional advice if you are unsure how to calculate it.
3. The capital allowance is a tax deduction, so it will reduce the amount of tax that you have
to pay. However, it is important to note that the capital allowance does not affect the amount
of profit that you make.
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How to calculate the capital allowance in taxation in Nigeria
Let’s first look at the factors affecting capital allowance calculation in Nigeria before looking
at how to calculate capital allowance in taxation in Nigeria.
Factors Affecting Capital Allowance Calculation in Nigeria
The calculation of capital allowance in Nigeria is based on the following factors:
1. The type of asset: The rate of capital allowance for an asset will vary depending on its
type. For example, the rate for plant and machinery is 20%, while the rate for buildings is
4%.
2. The age of the asset: The rate of capital allowance will also be affected by the age of the
asset. For assets that are less than 3 years old, the full rate of capital allowance can be
claimed. However, for assets that are older than 3 years, the rate of capital allowance will be
reduced.
3. The method of depreciation: The rate of capital allowance can also be affected by the
method of depreciation that is used. The most common method of depreciation in Nigeria is
the straight-line method, which means that an equal amount of capital allowance is claimed
each year over the life of the asset.
How to calculate capital allowance using the straight-line
method
The following formula can be used to calculate the capital allowance using the straight-line
method:
Capital allowance = (cost of asset minus disposal value) x depreciation rate x number of
years
Note:
1.Cost of asset: This is the purchase price of the asset plus any additional costs incurred in
bringing it into use.
2.Disposal value: This is the estimated value of the asset at the end of its useful life.
3. Depreciation rate: This is the rate of capital allowance that is applicable to the asset.
4. Number of years: This is the useful life of the asset.
Example
Let’s say a company purchases a piece of machinery for N10 million. The machinery has an
estimated useful life of 5 years and a disposal value of N1 million. The rate of capital
allowance for machinery is 20%.
The capital allowance that the company can claim each year is calculated as follows:
Capital allowance = (cost of asset minus disposal value) x depreciation rate x number of
years
= (10000000 – 100000) x 20/100 x 5.
= 9000000 x 20/100 x 5.
= N900000
Therefore, the company can claim a capital allowance of N9 million for the machinery each
year for the next 5 years.
Restrictions on the capital allowance
There are a few restrictions on the amount of capital allowance that can be claimed in
Nigeria. These include:
1. The maximum amount of capital allowance that can be claimed in any year is two-thirds of
the assessable profits.
2. A capital allowance cannot be claimed on assets that are used for personal purposes.
3. A capital allowance cannot be claimed on assets that are leased or rented.
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Conclusion
A capital allowance is a valuable tax deduction that can help businesses reduce their tax
liability. However, it is important to understand the rules and restrictions that apply to the
capital allowance in Nigeria in order to claim the maximum deduction possible.
We hope this article was helpful. Please let us know if you have any other questions. We
hope this article helps.
Frequently Asked Questions
1. What are the different types of capital assets in Nigeria?
The different types of capital assets in Nigeria are:
1. Plant and machinery: This includes assets that are used in the production of goods or
services, such as machinery, equipment, and tools.
2. Buildings: This includes assets that are used to house the business, such as factories,
offices, and warehouses.
3. Intellectual property: This includes assets that are created by the business, such as
patents, copyrights, and trademarks.
4. Goodwill: This is the value of the business's reputation and customer base.
2. What are the different rates of capital allowance in Nigeria?
The rates of capital allowance in Nigeria vary depending on the type of asset and its age.
For example, the rate for plant and machinery is 20%, while the rate for buildings is 4%.
The following table shows the rates of capital allowance for different types of assets in
Nigeria:
Asset type (rate of capital allowance)
1. Plant and machinery (20%)
2. Buildings (4%)
3. Intellectual property (50%)
4. Goodwill (N/A)
3. How is the useful life of an asset determined in Nigeria?
The useful life of an asset is determined by the taxpayer, but it must be reasonable. The
useful life is the number of years that the asset is expected to be used in the business.
The following factors can be considered when determining the useful life of an asset:
1. The type of asset
2. The industry in which the asset is used
3. The expected wear and tear of the asset
4. The expected technological obsolescence of the asset
5. What is the maximum amount of capital allowance that can be claimed in Nigeria?
The maximum amount of capital allowance that can be claimed in any year is two-thirds of
the assessable profits. This means that if a company’s profits are N10 million, the maximum
amount of capital allowance that they can claim is N6.67 million.
6. What are the restrictions on capital allowance in Nigeria?
There are a few restrictions on capital allowance in Nigeria, such as:
1. A capital allowance cannot be claimed on assets that are used for personal purposes.
2. A capital allowance cannot be claimed on assets that are leased or rented.
3. A capital allowance cannot be claimed on assets that are acquired from a related party.
4. A capital allowance cannot be claimed on assets that are disposed of within three years of
being acquired.
7. What are the benefits of claiming a capital allowance in Nigeria?
Claiming a capital allowance can help businesses reduce their tax liability. This can free up
cash that can be used to invest in the business or grow it.
Claiming a capital allowance can also help businesses improve their balance sheets. This is
because the capital allowance is deducted from the cost of the asset, which can make the
asset appear more valuable.
8. What are the steps involved in claiming a capital allowance in Nigeria?
The steps involved in claiming capital allowance in Nigeria are as follows:
1. Calculate the capital allowance for each asset.
2. Claim the capital allowance on your tax return.
3. Keep records of the assets that you have claimed capital allowance for.
The following documents may be required to claim a capital allowance in Nigeria:
1. Proof of purchase of the asset
2. Evidence of the useful life of the asset
3. Tax return
9. Where can I get more information on capital allowance in Nigeria?
The following resources can provide you with more information on capital allowance in
Nigeria:
1. The Companies Income Tax Act (CITA)
2. The Federal Inland Revenue Service's (FIRS) website
3. A tax advisor
10. What is the difference between capital allowance and depreciation?
A capital allowance is a tax deduction that businesses can claim on the cost of certain
capital assets. Depreciation is an accounting expense that businesses can claim to reflect
the decrease in the value of an asset over time.
The main difference between capital allowance and depreciation is that capital allowance is
a tax deduction, while depreciation is an accounting expense. This means that capital
allowance can reduce the amount of tax that a business has to pay, while depreciation does
not.
11. Can I claim a capital allowance on assets that are used for both business and
personal purposes?
No, you cannot claim a capital allowance on assets that are used for both business and
personal purposes. The asset must be used solely for business purposes in order to qualify
for a capital allowance.
12. What happens if I sell an asset that I have claimed a capital allowance for?
If you sell an asset that you have claimed capital allowance for, you may have to pay back
some of the capital allowance that you claimed. This is because the capital allowance is
calculated on the basis of the expected useful life of the asset. If you sell the asset before
the end of its useful life, you will have effectively claimed more capital allowance than you
were entitled to.
The amount of capital allowance that you have to pay back is calculated as follows:
(Sale proceeds minus disposal value) x depreciation rate x number of years used for
business