Capital allowance: types, rates, examples

Capital allowance: types, rates, examples

Are you just getting started with your first business? Here is a critical terminology that you will frequently be using — capital allowance. Through the understanding of this phrase, you will have an essential piece of information to help you maximise your annual business profits. In simple terms, the terminology refers to the amount of expenditure that your company can claim against your taxable profit.

Capital allowance
Source: UGC

The easiest way to dissect this topic is to check out the different types of capital allowance, their rates, examples, and on which expenditure you can claim the same.

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What is a capital allowance claim?

When filing the annual taxes for your business, the process of subtracting the amount of money you spent on buying business assets is what entails a capital allowance claim.

What are the different types of capital allowance?

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As part of understanding what this terminology means, it is time to dive into its different types. Here are the main types you should know about.

1. Annual investment allowance

This tax relief allows businesses to deduct the cost of machinery in full against their yearly profit. The machinery that qualifies for the AIA include computers, vehicles, equipment, and other machines. Also, you can include the cost of installing or uninstalling machinery.

2. Balancing allowance (BA)

The other name for BA is balancing change. It refers to the cost added or deducted from the pre-tax profit subject to the depreciation value on assets regarding whether the value is below or exceed the legally allowed limit.

3. Writing down allowance (WDA)

When claiming WDA, you add the cost of the assets you have acquired in the current tax year to the written down value of previous assets. To calculate this tax relief, you use the legally specified percentage of the total value.

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4. Small pools allowance (SPA)

The SPA comes into play when the value of your pool is less than a specific value after applying the AIA. In such a case, the SPA will allow you to claim the whole amount instead of opting for the WDA that will only allow 20 per cent of the value of the pool.

5. First-year allowance (FYA)

Similar to the AIA, the FYA enables you to claim the full 100% of the cost of eligible assets in the same accounting period. The cost FYA is exclusive of the yearly limit of the AIA.

FYA apply to specific types of expenditure such as:

  • FYA enables businesses to claim the full cost of valid assets they have purchased in an accounting year, and the total cost does not count toward the limit of AIA. Legible items include new energy-saving and water efficient machines, cars with low CO2 emissions, and new zero-emission vehicles.

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How much capital allowance can I claim?

Capital allowance: types, rates, examples
Source: UGC

It is a good course to want to know how to use this tax relief method to your benefit. However, before placing any claims, you need to know the rates. According to the Nigerian branch of PricewaterhouseCoopers, the rates for different claims vary. As such, you need to single out the specific claim you want to place and apply its rates.

Can I claim capital allowance on my car?

Yes, you can claim some benefits for your car when filing your taxes at the end of the financial year. In this case, you will use the FYA.

For instance, if you are wondering how to calculate the capital allowance for a motor vehicle, the steps dictate that you should do it as an individual, partnership, or company and follow the specific steps for each.

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From the above information, it is evident that capital allowance can be beneficial to the profitability of a business. Through this relief, a company can scale down its profit margins hence helping it to pay the minimum tax possible. The best way to benefit from the different types of claims is to involve a professional accountant who understands the business laws of your country.

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