Tax Education: Treatment of capital allowance for small companies

The Companies Income Tax Act Cap C21 LFN 2004 (as amended) allows companies that have incurred expenses on Qualifying Capital Expenditures for its trade or business to claim capital allowances on them. How does this apply to a small company (i.e. a company with a gross turnover of less than N25,000,000) whose turnover is exempted from income tax?

For the purpose of clarity, the Federal Inland Revenue Service (FIRS) released an Information Circular to clarify the treatment of capital allowances for small companies. The circular clarifies that:

  1. Where the profits of a small company is exempt from tax under section 23(1)(o), capital allowances on QCE employed in generating such tax-exempt profits is deemed fully utilized for and in those years of assessment in which the profits of the company were exempt from tax.
  2. Capital allowances relating to those years of assessment are not available for carry forward to future year(s) of assessment in which the company becomes taxable under the Act. This is in line with Sections 24 and 27(1)(h) of CITA (as amended).
  3. Where a small company incurred qualifying capital expenditure prior to crossing the threshold to medium or large, all allowances (initial and annual) for the period it was a small company are deemed utilized.
  4. Only annual allowance pertaining to the assessment years it operated as a medium or large company can be claimed.
  5. For qualifying capital expenditure incurred after crossing the threshold to medium or large, all capital allowances shall be available in line with the law.

FIRS further explained with treatment with the illustration below:

ABC limited incurred QCE on Furniture and fittings of N1,000,000 in 2020 year of assessment when the company has a gross turnover of N20,000,000; the relevant profits were exempt under Section 23(1)(o) of CITA.  The company crossed the threshold into a medium company in the fifth year of assessment after the QCE was incurred. What will be the capital allowance claimable on the QCE in that fifth year of assessment (i.e. 2024 YOA)?

Initial allowance is claimable for the year of assessment in which the QCE was first put into use, i.e. 2020 YOA. The initial allowance (deemed fully utilized) in that 1st YOA is N250, 000 (i.e. 0.25 X N1, 000, 000), while the annual allowances claimable yearly is N150, 000 (0.2 X N750, 000).  At the end of the fourth year (2023 YOA), a total capital allowance of N850, 000 would be deemed utilized (i.e. initial allowance of N250, 000 plus annual allowance of N600, 000 for four years). The tax written down value of the QCE carried forward to the fifth year of assessment will be N150, 000.  As such, the capital allowance claimable in the fifth year of assessment (i.e. 2024) is N150, 000 less the retention.

The Service may, at any time, withdraw or replace this Circular or publish an amended or updated version.

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