Understanding Capital Allowance Under the Nigeria Tax Act, 2025: What Every Business Should Know

Understanding Capital Allowance Under the Nigeria Tax Act, 2025: What Every Business Should Know

The First Schedule of the Nigeria Tax Act, 2025 delves into one of the most practical and impactful areas of taxation for businesses — Capital Allowance. This part of the law establishes the framework for how companies can recover the cost of their fixed assets over time, by deducting their value against taxable profits. It is not just an accounting procedure; it’s a fiscal policy tool designed to reward investment, promote productivity, and sustain economic growth through responsible asset management.

At its core, capital allowance is the government’s way of recognizing that assets used for generating income—such as machines, buildings, vehicles, and software—wear out or lose value over time. Instead of allowing companies to deduct the entire cost in one year, the law spreads that deduction across several years. This systematic write-off mirrors the real-life depreciation of assets, providing fair and predictable relief to businesses while ensuring that the tax system remains stable and equitable.

Acquisition Cost — What Counts Toward the Value of an Asset

The law begins by defining the acquisition cost of an asset. This term goes beyond the sticker price. It includes every expense necessary to make an asset ready for its first use. For example, if a company buys a new machine, the acquisition cost would include the purchase price, shipping charges, customs duties, installation fees, testing costs, and any preparation required to get the machine running efficiently. This comprehensive approach ensures that all genuine business costs are recognized before taxable profits are determined.

Basis Period — Defining When Income and Allowances Are Assessed

Next, the Act explains the basis period, which is the timeframe used to determine the profits of a company for tax purposes. This is also the period to which capital allowances apply. For most businesses, the basis period aligns with their accounting year, but the law provides for special cases.

If there is a gap between two accounting periods—say, when a company changes its year-end or faces temporary suspension of operations—the gap is treated as part of the next basis period. Likewise, when a business ceases to operate, the remaining time before closure becomes part of the final assessment period. This prevents any loss of taxable time and ensures that all operational periods, no matter how short, are captured under the law.

Concession — Recognizing Rights in Extractive Industries

The Act defines a concession as any right or lease related to the exploration or exploitation of natural resources like minerals, oil, or gas. Because these are wasting assets—resources that reduce in quantity with extraction—the law treats them differently from other business assets. By acknowledging concessions as capital assets, the law allows companies in extractive industries to claim allowances for their investments in exploration and development, ensuring fairness while recognizing the temporary and high-cost nature of resource-based operations.

Lease — Understanding Long-Term Use Rights

The definition of a lease in the Act is particularly detailed because leasing plays a major role in modern business financing. A lease includes any agreement that allows one person (the lessee) to use an asset belonging to another (the lessor) for a defined term, usually in exchange for rent or payment. This could be land, machinery, or even office space.

Importantly, if a lessee continues to use an asset after the lease expires—with or without a new agreement—the law still considers the arrangement a lease for tax purposes. This ensures continuity of claims and obligations. Similarly, if a new lease replaces an old one for the same asset, the tax system treats it as a continuation rather than a restart. This provision closes loopholes and prevents taxpayers from manipulating lease timelines to gain unfair tax advantages.

Mining Operations — Capturing All Forms of Extraction

Mining is defined broadly in this section to cover the extraction of any valuable mineral or geological material from the earth. It includes coal, metal, gemstone, salt, and uranium mining, as well as quarrying and subsea mining. This wide definition ensures that all extractive activities are subject to consistent tax treatment and that companies in this sector are properly accounted for when calculating allowances on their capital investments.

Qualifying Capital Expenditure — The Foundation of Capital Allowance

The heart of this section lies in the definition of Qualifying Capital Expenditure (QCE). This term identifies which types of spending can earn capital allowance deductions. The law recognizes that not all expenses are the same—some are revenue (day-to-day costs), while others create long-term value. QCE focuses on the latter.

1. Plant and Machinery

This category includes the cost of acquiring or installing equipment, industrial plants, construction tools, and even agricultural machinery. If a company purchases production equipment or farm implements, those costs qualify for capital allowance since they directly contribute to generating income.

2. Buildings

Expenditure on constructing buildings, structures, or permanent works for business use also qualifies, except when those buildings already fall under other asset classifications (for example, factory installations treated as machinery).

3. Mass Assets

These include items like tall upright poles or fixed structures, such as power transmission poles or communication masts. The inclusion of this category shows that the law accounts for infrastructural assets used in utilities and telecommunications.

4. Mining Assets

Spending on mining rights, exploration, testing, and development qualifies for capital allowance. Even costs that become useless when a mine or concession ends—such as shafts or tunnels left behind—are recognized, ensuring that mining investors are not penalized for natural depletion.

5. Agricultural Expenditure

The Act provides generous coverage for agriculture. It includes costs related to land clearing, plantation establishment, replanting, and pre-production expenses. It also covers ranching activities—constructing ranch buildings, breeding livestock, or maintaining long-term herds. Only animals or structures with life spans exceeding five years are included, ensuring relief is given only for sustainable, long-term agricultural investments.

6. Intangible Assets and Research

Research and development (R&D) expenditure also qualifies. This includes investment in equipment, patents, licenses, and new technological or scientific discoveries. For instance, developing a proprietary process, testing a new product, or building experimental prototypes all count as qualifying expenses. Nigeria’s inclusion of R&D as a qualifying asset highlights the government’s recognition of innovation as a driver of economic growth.

7. Motor Vehicles

Capital allowance is available for businesses owning fleets of vehicles—especially those in transportation. A company operating at least three public buses, intercity mass transit vehicles, or other commercial vehicles can claim allowances on these assets.

8. Heavy Transportation

This covers major transport infrastructure such as aircraft, ships, pipelines, and train engines. By including these large-scale assets, the law supports capital-intensive sectors like logistics, aviation, and energy.

9. Software

In a nod to the modern digital economy, the law acknowledges that software is a productive asset. The cost of acquiring, developing, or installing software used in business qualifies for capital allowance. This provision places Nigeria among countries recognizing digital infrastructure as central to economic productivity.

10. Furniture and Fittings

Finally, capital expenditure on furniture and fittings—office desks, fixtures, and equipment installations in ships or trains—also qualifies. These may seem small individually but collectively represent significant investment in business operations.

Trade or Business — Who Qualifies for Capital Allowance

Under this Part, the term trade or business encompasses all profit-oriented ventures. Whether it’s manufacturing, farming, transport, or consulting, as long as an entity earns taxable profits, it qualifies to claim capital allowances. This wide coverage ensures fairness and inclusion across industries.

Assets Acquired Through Hire Purchase or Finance Lease

The final part of this section clarifies ownership and eligibility under hire purchase or finance lease agreements. When a company acquires an asset under such an arrangement, the entity entitled to use and benefit from that asset—typically the lessee—can claim capital allowance, even if it does not legally own the asset yet.

This is a critical provision because many businesses finance their major assets through leasing. It prevents a situation where no one claims the allowance simply because legal ownership lies with the financier while actual use lies with the business operator. The rule ensures that tax relief aligns with real economic benefit, not just legal title.

Conclusion: Why Capital Allowance Matters to Businesses

This part of the Nigeria Tax Act, 2025 forms the technical and legal foundation for calculating how businesses recover their long-term investments. It defines what qualifies as an asset, who can claim relief, and how to treat modern assets like software and research just as seriously as machinery and buildings.

The Act acknowledges Nigeria’s diverse economy — one that includes mining, agriculture, logistics, technology, and services — and it gives each sector a structured way to benefit from its investments. By setting these rules, the law promotes economic growth, reduces the financial burden of capital-intensive projects, and ensures fairness in how businesses are taxed.

Capital allowance, therefore, is not just a tax adjustment — it is a strategic instrument for sustainable development, encouraging Nigerian businesses to invest in the future while maintaining compliance with a transparent and well-defined legal framework.

For expert explanations and professional guidance on compliance with the Nigeria Tax Act, 2025, visit www.bahasbooks.com — your trusted partner for tax, accounting, and business advisory solutions.

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