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When your business purchases capital assets—buildings, machinery, vehicles, equipment—you can't deduct the cost as an expense in the year of purchase. Instead, Nigeria's tax system provides capital allowances, which spread the tax relief over the asset's useful life. This guide explains how capital allowances work and how to maximize your claims.

Understanding Capital Allowances

What Are Capital Allowances?

Capital allowances are tax deductions for the cost of capital assets. They replace accounting depreciation for tax purposes:

Accounting	Tax
Depreciation	Capital Allowances
Company chooses rates	Rates prescribed by law
Charged to profit	Added back, then CA claimed
Based on useful life	Based on tax categories

Why Capital Allowances?

Accounting depreciation is not tax-deductible
Capital allowances provide tax relief for asset investments
Different assets have different prescribed rates
System ensures consistent treatment across businesses

Types of Capital Allowances

1. Initial Allowance (IA)

Claimed in the year of acquisition:

One-time claim
Percentage of qualifying expenditure
Reduces the tax written-down value

2. Annual Allowance (AA)

Claimed each year over the asset's life:

Calculated on reducing balance
Until asset is fully written off
Continues until disposal or full relief

3. Investment Allowance

Special allowance for certain investments:

Additional 10% for manufacturing
Claimed once in year of acquisition
Reduces taxable profit directly

Capital Allowance Rates

Standard Rates Table

Asset Category	Initial Allowance	Annual Allowance
Buildings (industrial)	15%	10%
Buildings (non-industrial)	15%	10%
Plant and machinery	50%	25%
Furniture and fittings	25%	20%
Motor vehicles	50%	25%
Office equipment	50%	25%
Computers	50%	25%
Agricultural plant	95%	Nil
Research equipment	95%	Nil

Special Categories

Asset Type	Treatment
Mining equipment	Specific rates apply
Oil and gas assets	Petroleum Profits Tax rules
Leased assets	Lessor claims allowances
Hired purchase	Buyer claims allowances

Calculating Capital Allowances

The Calculation Process

Year 1: Initial Allowance + First Year Annual Allowance

Subsequent Years: Annual Allowance on Reducing Balance

Example: Plant and Machinery (₦10,000,000)

Year	Calculation	Allowance	WDV C/F
Year 1
Cost	₦10,000,000
IA @ 50%	₦10,000,000 × 50%	₦5,000,000	₦5,000,000
AA @ 25%	₦5,000,000 × 25%	₦1,250,000	₦3,750,000
Year 1 Total	₦6,250,000
Year 2
AA @ 25%	₦3,750,000 × 25%	₦937,500	₦2,812,500
Year 3
AA @ 25%	₦2,812,500 × 25%	₦703,125	₦2,109,375
Year 4
AA @ 25%	₦2,109,375 × 25%	₦527,344	₦1,582,031
And so on...

Example: Motor Vehicle (₦15,000,000)

Year	IA	AA	Total CA	WDV C/F
1	₦7,500,000	₦1,875,000	₦9,375,000	₦5,625,000
2	—	₦1,406,250	₦1,406,250	₦4,218,750
3	—	₦1,054,688	₦1,054,688	₦3,164,063
4	—	₦791,016	₦791,016	₦2,373,047

Example: Building (₦100,000,000)

Year	IA	AA	Total CA	WDV C/F
1	₦15,000,000	₦8,500,000	₦23,500,000	₦76,500,000
2	—	₦7,650,000	₦7,650,000	₦68,850,000
3	—	₦6,885,000	₦6,885,000	₦61,965,000
4	—	₦6,196,500	₦6,196,500	₦55,768,500

Buildings take many years to fully write off.

Investment Allowance

What is Investment Allowance?

An additional 10% allowance for:

Manufacturing companies
Investment in new plant and machinery
Claimed in year of acquisition only

Example with Investment Allowance

Manufacturing company buys equipment for ₦20,000,000:

Allowance Type	Calculation	Amount
Investment Allowance	₦20,000,000 × 10%	₦2,000,000
Initial Allowance	₦20,000,000 × 50%	₦10,000,000
Annual Allowance	₦10,000,000 × 25%	₦2,500,000
Year 1 Total	₦14,500,000

Investment allowance is a significant additional benefit.

Qualifying Expenditure

What Qualifies for Capital Allowances?

Expenditure	Qualifies?
Purchase price	Yes
Delivery costs	Yes
Installation costs	Yes
Import duties	Yes
Professional fees (related)	Yes
Subsequent improvements	Yes
Repairs	No (revenue expense)
Maintenance	No (revenue expense)

What Doesn't Qualify?

Expenditure	Treatment
Land	No capital allowances
Stock/inventory	Cost of sales
Intangibles (usually)	Different rules
Leased assets (lessee)	Lessor claims

Asset Disposal

Balancing Allowance or Charge

When you sell an asset, compare:

Sale proceeds
Written-down value (WDV)

Scenario	Result
WDV > Proceeds	Balancing Allowance (deduction)
Proceeds > WDV	Balancing Charge (income)

Example: Balancing Allowance

Item	Amount
Original cost	₦10,000,000
WDV at disposal	₦3,000,000
Sale proceeds	₦2,000,000
Balancing Allowance	₦1,000,000

Example: Balancing Charge

Item	Amount
Original cost	₦10,000,000
WDV at disposal	₦3,000,000
Sale proceeds	₦5,000,000
Balancing Charge	₦2,000,000

The balancing charge is added to taxable profit.

Pooling of Assets

General Pool

Similar assets may be grouped:

Plant and machinery pool
Furniture and fittings pool
Motor vehicles pool

Advantages:

Simplified tracking
Balancing adjustments only on pool disposal
Administrative efficiency

Individual Asset Tracking

Required for:

Buildings (always separate)
High-value assets
Assets with different lives

Common Issues

Issue 1: Depreciation vs Capital Allowances

Error	Correction
Claiming depreciation as deduction	Add back depreciation, claim CA
Not claiming capital allowances	Calculate and claim in return
Using wrong CA rates	Apply statutory rates

Issue 2: Timing of Claims

Scenario	Treatment
Asset acquired mid-year	Full IA + AA allowed
Asset disposed mid-year	Balancing adjustment required
Asset under construction	Claim when brought into use

Issue 3: Capital vs Revenue

Expenditure	Classification
New building	Capital
Building repairs	Revenue (if restoring)
Building improvement	Capital
New machinery	Capital
Machinery repairs	Revenue
Machinery upgrade	Capital

Record Keeping Requirements

Fixed Asset Register

Maintain detailed records:

Asset description
Date of acquisition
Cost (including incidentals)
Location
Annual allowances claimed
Current WDV
Disposal details

Supporting Documentation

Keep for at least 6 years:

Purchase invoices
Import documentation
Installation contracts
Disposal receipts
Professional valuations

How Finora Manages Capital Allowances

Fixed Asset Module

Finora tracks your capital assets:

Asset Registration:

Enter asset details
System assigns CA category
Automatic rate application

Annual Computation:

IA and AA calculated automatically
WDV maintained
Schedules generated for CIT

Automatic Calculations

Each year-end:

Review assets acquired
Calculate allowances due
Generate CA schedule
Integrate with CIT computation

Disposal Tracking

When you sell assets:

Enter disposal details
Automatic balancing calculation
Adjust CA schedule

Reporting

Generate audit-ready reports:

Fixed asset register
Capital allowance schedule
Movement summary
Disposal analysis

Frequently Asked Questions

Can I choose which assets to claim allowances on?

You cannot pick and choose within a year. Claims are mandatory if you want to reduce taxable profit.

What if I forget to claim in a year?

Unclaimed allowances may be lost. File amended returns if possible, or claim carried forward amounts where permitted.

Do allowances continue if the asset is idle?

Generally yes, as long as the asset is held for business purposes. Permanent non-use may affect claims.

Can I claim allowances on leased assets?

If you're the lessee, generally no—the lessor claims. Check specific lease terms.

What about assets acquired through hire purchase?

The buyer/hirer can claim capital allowances even though they don't yet own the asset outright.

Conclusion

Capital allowances are essential for managing your CIT liability. Key points:

Depreciation is not tax-deductible—claim capital allowances instead
Rates are prescribed by law—different assets have different rates
Initial allowance gives significant Year 1 relief
Annual allowances continue until the asset is fully written off
Investment allowance provides extra benefit for manufacturers

Proper tracking of assets and timely claiming of allowances can significantly reduce your tax bill.

Finora automates the entire capital allowance process—from asset registration to annual calculations to disposal adjustments.

Maximize your capital allowance claims

Get started for free and let Finora automatically calculate capital allowances on all your business assets.

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