WHAT IS CAPITAL ALLOWANCE?
Capital allowance is an amount of money spent on business assets that can be subtracted from what a business owes in tax. Capital allowances allow taxpayers to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual taxable income.
WHY CAPITAL ALLOWANCE?
The purpose of capital allowance is to give relief for wear and tear of fixed assets, and it is granted in place of depreciation that is used to reduce the tax payable. Capital allowance is only applicable to a business, and not an individual.
CALCULATION OF CAPITAL ALLOWANCE
In April 2019, Company Bee bought furniture and fittings for NGN 1,000,000. The accounting year ends on 31 December. Calculate the capital allowance.
The capital allowance rates for addition to furniture and fittings are
25% – initial allowance
20% – annual allowance
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
The capital allowance rate of plants and machinery differs from furniture and fittings.
The annual allowance will be prorated for the year. From April to December 2019 is nine (9) months.
A company purchased N20,000 machinery on 1 June 2016 with a useful economic life of 4 years and has taxable profits for the year to 31 May 2017 of NGN100,000. The N20,000 will be eligible for the annual investment allowance:
|Capital allowances pool|
|Additions (machinery purchased 1 May)||N20,000|
|Annual Investment Allowance||(N20,000)|
|Balance carried forward||Nil|
|Less: Capital allowances||(N20,000)|
|Profits chargeable to Corporation Tax||N85,000|
|Corporation Tax @ 19%||N16,150|
Note that depreciation has been calculated by spreading the purchase price over the useful economic life (N20,000 / 4 = N5,000 per year).