Businesses often buy items that will generate benefits above 12 months. When these items are also tangible and hard to convert into cash, they are called fixed assets. Each company is free to set a threshold for recognizing fixed assets in its books. A blue-chip company listed on the Nigerian Stock Exchange (NSE) may recognise an item as fixed assets if the amount is above NGN1,000,000. Meanwhile, a medium-sized company could fix a threshold of NGN300,000. As the value of fixed assets reduces, an amount known as depreciation is set aside over the asset’s useful life. Depreciation reduces a company’s profit before tax. Furthermore, a company’s choice of depreciation can lead to various accounting profits. This may also distort taxable profits. Hence, the Nigeria Tax Act 2025 allows capital allowance in Nigeria as a deductible expense instead of depreciation. Note: Companies Income Tax Act (CITA) LFN 2007 has been repealed.
Definition
Capital allowance is a claim against the assessable profits of a company. It spreads the tax relief for the cost of a qualifying capital expenditure (QCE) over some years. A company cannot reduce its taxable profits with depreciation expense and capital allowance. Taxable profits, holding other adjustments constant, is net profits plus depreciation minus capital allowance.
The tax relief is not automatic. A taxpayer must fulfill four (4) conditions to claim capital allowance.
Conditions for claiming capital allowance in Nigeria
- The company must have incurred qualifying capital expenditure in generating the assessable profits for the period. Under the Nigerian tax law, QCE differs from fixed assets. QCE is the acceptable type of fixed assets that enjoys tax relief.
- Taxpayer has paid the value added tax (VAT) due on the asset or the import duty or levy (on an asset that was imported).
- Where only a part of QCE is used in generating the assessable profits, the capital allowance will be prorated. Only the portion of the taxable income will be deducted.
- The capital allowance shall not be prorated where the non-taxable income is below ten percent (10%) of the total income of the company.
- The taxpayer making the claim must own the qualifying capital expenditure.
- The taxpayer must be the beneficial owner of the asset at the end of the basis period.
- The asset must be in use wholly, reasonably, exclusively and necessarily use for company at the end of its basis period. The tax payer 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)
Types of capital allowance
- Annual allowance: It is a tax relief based on the cost of the asset less initial allowance divided by the number of tax useful life. To get the tax useful life, you will divide 100% by the annual rate of allowance. The tax written down value of the asset should not be reported as nil. Rather, a balance of 1% should be kept as residue for each asset.
- Balancing adjustment: It is calculated at the point of disposing QCE.The two types of adjustment are balancing charge and balancing allowance. A balancing charge is when the sales proceeds is higher than the tax written down value. Tax written down value is the cost of the asset less the capital allowance claimed till date. Balancing charge is added to the profits for income tax. On the other hand, balancing allowance arises when the tax written down value is higher than the sales proceeds. Balancing charge is deducted from the profits for income tax. If no capital allowance was calculated on a QCE, then there will be no balancing adjustment in the first instance.
NOTE: The provisions relating to initial allowance and investment allowance have been removed.
Rates for initial and annual allowances
The price of land increases in value over time. Hence, land does not qualify for either depreciation or capital allowance. However, building on that land qualifies for tax relief. Under the Finance Act 2020, the cost of software or similar capital payments on electronic applications are QCE.
Restriction on capital allowance
The maximum amount that is deductible is two-thirds of assessable profit. This makes a company pay tax on the remaining one-third of assessable profit. However, any company in the agro‐allied industry or a manufacturing company can claim the entire amount, that is, no restriction. Let’s take a look at how to compute capital allowance.
A copy of the relevant provision is in the Second schedule of CITA and to download the Finance Acts, check our Resources Page .