In financial accounting, a business can depreciate its fixed assets with a straight-line method or reducing balance method or units of production. However, the principle is different for calculating the capital allowance. All taxpayers must use the same rate. Schedule II of the Companies Income Tax Act 2004 contains the capital allowance rates in Nigeria for qualifying capital expenditure.
Note, that the tax provision uses “qualifying capital expenditure (QCE) and not fixed assets. A fixed asset must therefore meet certain conditions to be a QCE. Next, a taxpayer will calculate capital allowance using the appropriate rates. There are two types of rates for capital allowance in Nigeria. They are initial and annual allowance which have been discussed in our article on capital allowance in Nigeria.
Capital allowance rates
The table below shows the various rates on QCE.
| Qualifying expenditure | Initial allowance (%) | Annual allowance (%) |
| Building (industrial and non-industrial) | 15 | 10 |
| Mining | 95 | NIL |
| Plant: – Agricultural production | 95 | NIL |
| – Others | 50 | 25 |
| Furniture & fittings | 25 | 20 |
| Motor vehicle: – Public transportation | 95 | NIL |
| – Others | 50 | 25 |
| Plantation equipment | 95 | NIL |
| Housing estate | 50 | 25 |
| Ranching & plantation | 30 | 50 |
| Research & development | 95 | NIL |
How to use the rate
- Determine the initial allowance (IA). Initial allowance rate * cost of the asset.
- Calculate the annual allowance (AA). Annual allowance rate * (Cost of the asset minus initial allowance).
- Initial allowance is a one-off relief. A taxpayer can claim both IA and AA in the first year of purchase. After the first year, a taxpayer can claim an annual allowance only. A company must retain NGN10 for each asset in the accounts until the business disposes of the assets.
- The provisions of Finance Act 2023 have scraped investment allowance for companies that incur expenditure after September 1 2023.
- Capital allowance can reduce the assessable profits before arriving at the taxable profits. However, the maximum capital allowance that a taxpayer can claim is two-thirds of assessable profits except a company in the agro‐allied industry or a manufacturing company.
A copy of the relevant provision is the Second schedule of CITA.