The Federal Inland Revenue Service (FIRS) adopted the treatment of leasing by the International Accounting Standards on Leases SAS 11, and accordingly classifies leases for tax purposes as either finance or operating leases, together with other variants of leasing such as leveraged leases, sale and lease back and sale – type lease.
At this point, it is important to explain some general principles as background to the specific tax issues in leasing to be discussed.
Capital Allowance granted in lieu of Depreciation
The means of spreading the total cost of the assets used up in any accounting period, is known in financial accounting as depreciation. However, there are different methods of calculating depreciation. These include: straight line, reducing balance, sum of year’s digit etc. None of them is enforceable on all taxpayers.
Subsequently, two assets with the same value and capacity, acquired by two different taxpayers on the same day and put to similar use, may attract different depreciation expenses in an accounting period, where different methods are adopted. For this reason, depreciation is not an allowable expense in taxation.
The ‘tool’ of compensation that introduces consistency and uniformity to all the taxpayers, is known as capital allowance.
Conditions for Granting Capital Allowance
For an asset to qualify for capital allowance, the following conditions must be satisfied:
- Expenditure must have been incurred on the asset.
- The asset must be owned by the person making the claim.
- The asset must be used for the purpose of the trade, business, profession or vocation generating taxable profit.
- The asset must be in use at the end of the relevant accounting year. Periods of temporary dis-use are ignored.
- A claim must be made in writing by the taxpayer before it can be granted.
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