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Capital Allowance Concept

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Definition

Reduction in the amount of corporation tax payable, often offered as an incentive for investment in large-scale projects (that increase a country’s production capacity and stock of capital). A certain percentage of the capital asset’s cost is allowed as capital allowance during the accounting period in which it was purchased.

This amount is greater than the depreciation charge on the asset during that period.

Capital Allowance Concept Explained

A form of scheduled tax deduction to determine the amount of taxable income.

This usually reflects depreciation of asset value.

Type of depreciation and the rate varies depending on the defined capital category as per nation tax code.

The main type of depreciation –

  • Straight line – equal allowance amount over number of years (for example, 10% depreciation per year for 10 years)
  • Declining balance – fixed percentage of the residual un-depreciated capital at the end of the previous period.
  • Unit of production – depreciation rate linked to the fraction of the volume of goods produced during the year to the remaining volume at the beginning of the year.

Relatively simple concept.

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