Every tax-adjusted profit computation begins with the same question, asked expense by expense: is this revenue, deducted in full today, or capital, recovered slowly over several years? Get the classification wrong on even one line and the entire computation that follows it is wrong. This guide gives you the exact statutory test, the full Third Schedule rate table, and the trap CITG examiners set most often.
What Is a Revenue Deduction?
Under Section 9 of the Income Tax Act, 2015 (Act 896), a person computing income from a business deducts “an expense to the extent that that expense is wholly, exclusively and necessarily incurred by the person in the production of the income… during the year.” Section 9(2) explicitly excludes expenses “of a capital nature,” and Section 9(3) defines that as an expense that “secures a benefit that lasts for more than twelve months.” In plain terms: if the benefit is used up within the year, it’s revenue, and you deduct 100% of it now.
What Is a Capital Allowance?
Section 14 of the same Act grants capital allowances “in respect of a depreciable asset owned and used by a person during a year of assessment in the production of the income,” calculated under the Third Schedule. The Schedule sorts every depreciable asset into one of five classes, each pooled together and depreciated at its own statutory rate: Class 1 (computers) at 40%, Class 2 (vehicles, plant and manufacturing machinery) at 30%, Class 3 at 20% — all three on the reducing-balance method — and Class 4 (buildings, furniture, and any asset not elsewhere classified) at 10%, plus Class 5 (intangible assets) at 1 divided by useful life, both on the straight-line method. Crucially, Section 14(3) makes the allowance compulsory once granted: a taxpayer “shall take the capital allowance in that year and shall not defer that capital allowance.”
Capital Allowances vs Revenue Deductions: Comparison Table
| Feature | Revenue Deduction (s.9) | Capital Allowance (s.14 + Third Schedule) |
|---|---|---|
| Nature | Ordinary running cost | Cost of a depreciable asset |
| Timing | Deducted 100% in year incurred | Spread by class rate over several years |
| Method | Straight deduction | Pooling — reducing balance (Cl.1–3) or straight line (Cl.4–5) |
| Optional? | Claimed as incurred | Compulsory — cannot be deferred |
The Trap CITG Examiners Set
A “repairs to premises” line item that actually describes rebuilding or extending a structure — not restoring it — is capital expenditure disguised as an operating cost. The reverse trap also appears: routine repainting or servicing wrongly capitalised. Test every disputed line against the twelve-month benefit rule in Section 9(3) before you classify it.
Exam tip: Accounting depreciation is never tax-deductible. Always add it back in full in your computation, then deduct the correct capital allowance figure calculated separately using the Third Schedule rates.
Conclusion
Revenue deductions and capital allowances are not a matter of preference — the Act draws the line precisely at whether the expense’s benefit lasts more than twelve months. Master the Section 9 test, memorise the five Third Schedule classes and their rates, and build every tax computation as a two-step process: add back accounting depreciation, then deduct the statutory capital allowance instead.
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