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Financial Literacy

What is Capital Allowance?

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What is capital allowance

Capital Allowance is a claim against Assessable Profits by companies when computing their tax liabilities. It is only calculated when a company is computing its tax liabilities. Usually, when companies prepare income statement they always charge depreciation as an expense before arriving at their profit before tax. However, there are different methods of calculating depreciation which can affect how a company’s profit is arrived at which makes equitable calculation of taxation impossible. As such, when computing income tax you must add back depreciation (previously deducted) to the profit before tax before now applying capital allowances.

Types of Capital Allowances;

There are four types of capital allowances

  1. Initial Allowance (Charged once in the life of an asset)
  2. Annual Allowance (Charged Annually over the life of an asset after Initial Allowance has been deducted)
  3. Balancing Adjustment (This arises after when a QCE has been disposed off)
  4. Investment Allowance (This is granted once in a life of a QCE and is used to encourage investment in certain sectors of the economy).
How is it applied: After Capital Allowances is computed the amount is applied to the Assessable Profit before arriving at the Chargeable Profit. The 30% Income Tax Rate is then applied to the Chargeable Profit. There are however restrictions to how much capital allowances can be deducted from your adjusted profit.
Restriction on Capital Allowances: For businesses other than those in the Manufacturing and Agricultural Sector, the maximum capital allowance that can be claimed can not be more than two-third of the assessable profit. Meaning that tax must be paid on at least one-third of the assessable profit. Here is an example;
Company ABC which is into supplies of chemical equipments reported an adjusted (assessable) profit of N8,000,000. However its capital allowance claim for the year is N12,000,000. His Income Tax payable will thus be;
 
Assessable Profit                                               N                            N
 
Assessable Profit                                                                       8,000,000
Capital Allowance                                        12,000,000
Relieved (2/3 of N12m)                                 (5,360,000)         (5,360,000)
Unutilized Capital Allowance c/f                      6,640,000

Taxable Profit                                                                            2,640,000
Tax Payable 30%                                                                         792,000

Conditions for Claiming Capital Allowances

Here are the conditions that must be met before claiming capital allowances;

  1. The Tax Payer making the claim must own the qualifying capital expenditure. Meaning, the company must own the asset upon which the claim is being made
  2. The Qualifying Capital Expenditure (QCE) must be used for the purpose of a trade or business. For example, a generator in the home of an MD of a company cannot qualify as capital expenditure. The QCE must also be in use at the end of the period for which the tax is being computed.
  3. If the Qualifying Capital Expenditure is more than N500,000, then an acceptance certificate must be obtained from the Inspectorate Division of the Federal Ministry of Industry.
Capital Allowance should be computed by a qualified Chattered Accountant as it involves several computation that can be confusing to a novice. However, the above post is expected to give you an idea of what it means. The rates for Capital Allowances can be found here

 

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

11 Comments

11 Comments

  1. 1333016885

    August 26, 2012 at 10:52 am

    undastndn……………………………… I love dis.

  2. Anonymous

    September 18, 2015 at 4:40 pm

    Thank you

  3. Anonymous

    October 19, 2015 at 3:53 pm

    Should it not be 2/3 of the Assessable Profit not capital allowances?

  4. Anonymous

    June 29, 2016 at 9:49 am

    This should Be a restriction on the assessable profits. Well done anyways.

  5. Swiss

    June 19, 2017 at 9:00 am

    Is capital allowance granted only to petroleum operations

  6. Anonymous

    July 29, 2017 at 3:34 pm

    Are companies taxable under PPTA better of in terms of capital allowance than those under CITA?

  7. Anonymous

    October 27, 2017 at 10:47 am

    But 5,360,000 is not 2/3rd of N12m?

  8. Bolaji emmanuel

    March 24, 2018 at 1:14 pm

    WHAT IF THE ASSETS WAS ACQUIRED 6 MONTHS BEFORE THE ACCOUNTING YEAR END, COULD THE CA BE PRORATED?

  9. Anonymous

    June 27, 2018 at 2:33 pm

    the link to the rates for capital allowances gives an error 404 page not found

  10. Anonymous

    March 28, 2019 at 10:26 am

    Thank you, Ugo. What if the capital allowance is not up to the assessable profit of N8m? Should the same restriction apply?

  11. Idowu Abiodun

    May 17, 2019 at 4:20 pm

    capital allowance rate is not seen

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Personal Finance

10 Business mistakes to avoid post-COVID-19

With the emergence of lockdown and social distancing, businesses are now incorporating innovative working arrangements.

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The "new normal" in business and economy

Not only did COVID-19 spread globally, it also stopped all activities in almost every sphere of human endeavour.

Apart from the fact that the pandemic affected many lives, it also brought about a great disruption in the business sector.

SMEs and large enterprises have experienced various forms of contractions, and this has led to business closure for some. Many companies thrived on an existing modus operandi and were not prepared for the impacts of the pandemic. However, with the emergence of lockdown and social distancing, businesses are now incorporating innovative working arrangements like remote working, online services as well as regular variation in shifts.

READ MORE: 3 major ways COVID-19 will affect Banks’ 2020 profits

While the pandemic is still being brought under control, a new order of business operations has been established and going forward, businesses must carefully plan and think out ways to thrive.

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While planning on how to navigate the whole situation carefully, it is advisable to take note of certain mistakes that could hinder their progress.

This article provides for you ten (10) mistakes you should avoid making in your business post-COVID-19.

READ ALSO: Rewane outlines sectors to drive economy in 2020 

1. Not having an online presence

The pandemic brought a halt to movement and large gatherings, and this stopped many businesses that existed mainly on physical interactions to stop and pack up. Business owners must learn that it is a huge travesty to plan their strategy without having an online presence; in fact, they would be missing a lot. They must strategically think of going digital and maximize the opportunities that come from interacting with over 4.5 billion people.

2. Limiting the business vision

The pandemic has pushed heads of enterprises to a position of mere survival. Plans and decisions are being made just for the moment without considering the long term existence of the business. Every business started off with a mission, a set of objectives to achieve and needs to meet. Regardless of the economic transition, it is important to hold those goals in mind while constantly seeking ways to attain them.

3. Poor marketing strategy

With the emphasis placed on marketing, especially on digital marketing lately, and the importance it holds for any business, it is not only a mistake for an establishment to limit its marketing strategies but a business taboo as well. Many products and services have emerged during the pandemic which poses competition to already existing providers. It is a necessity to brush up the marketing game in order to gain relevance in the business sector and source for more leads as well.

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4. Building on hope

Optimism is good, but planning is better. We are moving into an era of intense technological integration which has influenced various business operations. E-commerce, as well as remote working, has become a norm and businesses will have to move with the flow. There are quite a number of entrepreneurs who are waiting for the tides to calm so they can paddle their boats. The trick is in planning while waiting. It is okay to place one’s bet on hope but mapping out plans for sustenance is more advantageous.

5. Unplanned redundancy

It will seem like the way out for most enterprises to lay off some of their workers in order to survive the disastrous financial situation they may experience. However, one key factor in adopting this strategy is to carefully examine the effect it might have on the growth of the business. Over time, there might be a need to hire new workers which will incur a cost in recruiting and training new employees. Low man-power influences productivity. As such, measures must be put in place to make up for the labour pool that will be cut off.

6. Pouring new wine in old wineskins

Innovation has been on the rise on account of the pandemic. New commercial and industrial techniques are sprouting paving the way for longevity. Holding onto old and familiar methods that are no longer effective could constitute a big mistake for any business. Entrepreneurs and managers have to embrace the reality that comes with post-COVID-19 with a sense of focus.

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7. Ill-suited rigidity

Flexibility is one of the keys to thriving after the transition. Understand that the pandemic has affected the world economically and otherwise. Hence, it is crucial to adapt to the changes by inculcating new plans, being versatile and multifaceted rather than being inappropriately unbending.

8. Neglecting creativity

Neglecting the power of creativity is a costly mistake every business should avoid making. The post-COVID-19 period will be a salient time to be creative and innovative. Establishments should be on the lookout for how to meet the needs of consumers, ways to improve their services in order to stay in vogue. Teachers are resorting to virtual classrooms; traders are integrating e-commerce; companies are investing in work-from-home technology. It is all about creativity.

READ ALSO: The “new normal” in business and economy

9. Ineffective communication

With much regards given to remote work and other emerging working arrangements, it is important to devise means to ensure effective discharge of duties by members of any business. The ineffective flow of communication can retard the growth of businesses which is one of the mistakes to avert. When workers understand that it takes collective effort to ensure the continuity of the business, it becomes easy for them to efficiently invest their energy.

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10. Poor assessment

Disregarding the place of systematic evaluation of the performance of any enterprise is one of the business mistakes to avoid post-COVID-19. There should be a feasible assessment carried out to ascertain where the business stands in terms of labour force, expenditures, cash flow and returns on investment.

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Conclusively, there is no green light as to whether a post-COVID-19 will exist or not. However, as the virus lingers, each business owner must adjust to make sure they do not make the above-mentioned mistakes or other possible business mistakes that may not have been mentioned in this article.

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Financial Literacy

Five things to consider before securing a loan

It is important to consider these five tips before securing a loan.

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Financial security is when you know you do not have to worry about the basic needs of life. It also involves having the courage to comfortably withstand any emergency life throws your way.

The outbreak of COVID-19 was unexpected. Apart from the health implications it caused, the global economy has suffered greatly.

The outbreak of the virus resulted in job losses and business closure. The situation is so worse that even stable sources of income are no longer guaranteed.

As a result, many people have had to reduce their expenses, and the need to seek loans to enable sustainability or survival is on the rise.

While many may consider taking loans to meet their current needs, here are five (5) tips on what to consider before taking that step.

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1. The lender

With different financial institutions willing to offer loans, it is crucial to find the right lender. At a critical time, such as this, securing a loan can come at significant risk and cost. It is, therefore, essential to get it from a source that will provide acceptable terms. It could be from a friend, family, community fund or a microfinance bank. Ensure you secure the loan from a lender willing to give you the best possible conditions and a well laid out repayment plan.

2. Do Your Homework

Research is key. Do your homework and be well informed about it. Ensure you have a realistic means of repayment. Look at the viability of the loan and ensure that you have a realistic chance of paying back on its due date.

3. Work Out Your Payment Plan

Many focus on planning on how to spend a loan and determining how much they need to secure. While this is essential, it is equally important to plan on how you will repay a loan. It would be best if you decide whether you will be paying on a weekly or monthly basis. These factors will guide you in choosing a loan with favourable payment terms to avoid unplanned costs.

4. Credit History

Having a good sense of your credit history is also very important. Know your cash flow and be sure of your income and expenses. Know the precision in terms of what you can get and when you can get it, so as to draw up an excellent and reasonable payback strategy.

5. Terms and Conditions

Ensure you read the fine print and understand the various terms and conditions of a loan before signing any legally binding documents, including a personal loan agreement. In some instances, you may find it difficult to understand certain things regarding the loan you are about to secure. Try as much as possible to clarify all doubts before taking the final decision.

Financial strain may not be the sole purpose of taking a loan. However, whatever the reason may be, it is crucial to consider these five tips before securing one.

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Personal Finance

10 things to adopt in your business to adjust to the new normal

As scary as the thought might be, the new normal might last for a very long time.

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Nairametrics Financial literacy, invest intelligently, portfolio diversification, treasury bills, Your next of kin, or not?, Investing in uncertain times, Things to accomplish during COVID-19 lockdown

Towards the end of 2019, many businesses wrote their plans, strategies and goals for 2020 and were ready to dominate the market. However, the year did not start as many thought it would. The COVID-19 pandemic brought about new ways of doing things, which is now known as the ‘new normal’.

As scary as the thought might be, the new normal might last for a very long time. Therefore, businesses need to find a balance between what worked in the past and what needs to be done to adjust to the new normal. While some businesses were forced to shut down, many businesses had to change their strategy in order to adjust to the new normal.

Any business can survive the pandemic and adjust to the new normal just by pivoting to a new business strategy. As a business owner, you have to think about growth and look for methods you can adopt in your business to adjust to the new normal and remain relevant. Keep reading to discover ten (10) things you can adopt in your business to adjust to the new normal.

1. Accept the changes 

The first and most important thing to do for your business to adjust to the new normal is to accept the changes and embrace the new normal. Waiting for things to go back to normal before you continue your business is the wrong move because things might never go back to the way they were.

2. Think Technology 

Innovation and the use of technology in businesses have been on the rise, before the pandemic. Technology is the future of the business world. The latest trend since the pandemic started is to replace manpower with technology. With this, the business continues without endangering the lives of the employees.

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3. Change your business model

Reinvent your business, align your business strategies with society’s changing needs and develop a low-cost business model that would help you to stay in business while delivering your best.

4. Involve your employees

The business world has reached a level where you have to involve your employees in the decision-making process. This gives them a sense of responsibility and makes them more involved in the growth of the organisation. Involving your employees will help the business to adjust well and experience growth.

5. Focus on your customers 

Listen to your customers. Make an effort to meet their increasing demand and take advantage of their changing attitudes and behaviour. You can do this by conducting a survey and requesting feedback. This is the best time to conduct market research and get all the information you need. This way, you would know if you are on the right track.

6. Stay connected

Transitioning from the current state (Covid-19) to recovery state (Post Covid-19) requires staying connected to the outside world. The question; ‘what is working or not working for other businesses?’ should be asked as often as possible.

7. Adopt a mobile strategy

Since the beginning of the pandemic, the majority switched to remote working, which might have brought about a reduction or lack of communication for some businesses. Business owners should work on their communication system during this period by employing a mobile strategy to get employees up and running.

8. Focus on advertisement and marketing

To cut costs, many businesses are cutting their advertising and marketing budgets, so any business that focuses on advertising and marketing will get all the attention it needs now.

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9. Collaboration, flexibility and accountability

The best time for flexibility, collaboration and accountability in business is now. Adopting systems such as informal interactions and remote work would help build a flexible, accountable and better workforce. Not only will this make your employees happy, but it will also give your business the exposure it needs.

10. Risk management systems

Businesses should take advantage of this opportunity to set up a risk management system. The pandemic is enough enlightenment for businesses to know that they should put measures in place to identify, assess, monitor and mitigate the impact of risk on their business in future.

If your business has been affected by the pandemic, you can get back on your feet and begin to break new grounds. All you have to do is adjust your business to the new normal by thinking differently and being strategic in all dealings.

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