What capital allowance means
A capital allowance is the tax system's version of depreciation.
When a business buys equipment, a vehicle or a building, it cannot deduct the whole cost as an expense in the year of purchase, because the asset lasts for years. Accountants handle that with depreciation, spreading the cost over the asset's useful life.
Nigerian tax law does not accept depreciation as a deduction. It is added back when taxable profit is computed. In its place, the tax system grants capital allowances on qualifying capital expenditure, at rates the legislation sets.
The two do not match, which is why a company's accounting profit and its taxable profit differ. Depreciation is removed and capital allowances are substituted, and the difference can be substantial for an asset heavy business.
The consequence is practical: a business that invests in qualifying assets reduces its tax bill, and one that does not, does not.
How it is used
Allowances are computed on qualifying capital expenditure, by category of asset, and the categories carry different rates.
A common structure grants an initial allowance in the year the asset is first used, and an annual allowance in that and subsequent years, until the cost is written off.
The expenditure must be capital rather than revenue, must be on a qualifying asset, and the asset must be in use for the purpose of the business. An asset bought and not put into use does not attract the allowance for that period, which catches companies that acquire equipment ahead of a project.
On disposal, a balancing adjustment arises. Where the asset is sold for more than its tax written down value, a balancing charge claws back part of the relief. Where it is sold for less, a balancing allowance gives further relief.
Record keeping is what makes the claim work. Invoices, evidence of payment, the date the asset was brought into use, and a fixed asset register reconciled to the accounts. A company claiming allowances it cannot evidence is the standard tax audit finding.
Key features
- Tax relief for qualifying capital expenditure on business assets
- Replaces accounting depreciation, which is not deductible
- Typically an initial allowance plus annual allowances until written off
- Rates differ by category of asset
- The asset must be in use for the purpose of the business
- A balancing charge or allowance arises on disposal
How this works in Nigeria
The mechanics sit in the companies income tax legislation and its schedules, which set the qualifying categories and the rates.
Three practical points matter most for a Nigerian business.
Capital versus revenue. Whether expenditure is capital or revenue decides whether it is deducted in full now or relieved over years. Repairs are generally revenue; improvements that enhance the asset are capital. The line is a frequent audit issue, and the treatment should be decided and documented at the time rather than argued afterwards.
In use. Allowances depend on the asset being in use for the business. A company that imported plant which sat in a warehouse for eighteen months should not be claiming for that period, and a tax audit will ask when it was brought into use.
Documentation. The fixed asset register, the purchase invoices and the evidence of when each asset entered service are what support the claim. Companies that claim from the accounts without an underlying register struggle when the claim is examined.
The tax reform legislation passed in 2025 revised significant parts of the Nigerian framework. Rates, categories and the interaction with other incentives should be confirmed against the current legislation rather than an older schedule.
Where a company holds pioneer status, the interaction between the relief period and capital allowances needs specific attention, because allowances arising during a tax holiday are treated in a particular way.
Capital allowance vs depreciation vs expense
Three ways the cost of something is recognised, only two of which reduce tax.
An expense is revenue expenditure consumed in the period: rent, salaries, utilities, repairs. It is deducted in full in computing taxable profit for that year.
Depreciation is the accounting spread of a capital cost over an asset's useful life. It reduces accounting profit and is added back for tax, so it does not reduce the tax bill.
A capital allowance is the tax relief that replaces depreciation. It is computed under the tax schedules on qualifying capital expenditure, at rates the legislation sets rather than at rates the company chooses.
The practical consequence is that a company's tax computation starts from accounting profit, adds back depreciation and other disallowed items, then deducts capital allowances. Two companies with identical accounting profits can have very different tax bills depending on what they invested in.
Limits and risks
Allowances only apply to qualifying capital expenditure. A service business with few assets gets little benefit however much it spends.
The capital versus revenue boundary is also uncertain in places, and a treatment adopted by the company can be challenged on audit.
Relief is spread over years rather than given immediately, so the cash flow benefit lags the expenditure.
Balancing charges on disposal claw back relief, which surprises businesses selling assets they had written down.
And the rules change. The 2025 tax reform revised significant parts of the framework, so schedules and rates should be confirmed against current legislation.
Worth knowing
Keep a fixed asset register recording what each asset cost, when it was bought and when it was actually brought into use. Nigerian tax audits disallow capital allowance claims that cannot be tied to invoices and an in service date, and reconstructing that afterwards is far harder than maintaining it.
Questions people ask
What is a capital allowance?
Tax relief for qualifying capital expenditure on business assets, granted at rates set by the tax legislation. It replaces accounting depreciation, which is not deductible in Nigeria.
Why is depreciation not deductible?
Because companies choose their own depreciation policies, which would make taxable profit inconsistent between businesses. Nigerian tax law adds depreciation back and substitutes capital allowances at prescribed rates.
What is the difference between capital and revenue expenditure?
Revenue expenditure is consumed in the period and deducted in full, such as repairs. Capital expenditure creates or improves an asset and is relieved over years through capital allowances. The line is a frequent audit issue.
Do I get allowances on an asset I have not used yet?
Allowances depend on the asset being in use for the purpose of the business. Equipment sitting in a warehouse pending a project does not attract the allowance for that period, and auditors ask when it entered service.
What happens when I sell an asset?
A balancing adjustment arises. Selling above the tax written down value produces a balancing charge clawing back relief; selling below produces a balancing allowance giving further relief.
Have the rules changed recently?
The tax reform legislation passed in 2025 revised significant parts of the framework. Confirm rates, categories and the interaction with incentives such as pioneer status against the current legislation.