What are Capital Allowances?

Also known as a writing down allowance, the capital allowance is a tax benefit that a company can claim on funds spent on fixed assets. An allowance of this type can be applied to the costs of buildings and various types of machinery works that are necessary for the core function of the business. The concept of capital allowances is found in the tax codes for several nations, including the United Kingdom and the United States.

The main function of capital allowances is to allow businesses to claim tax write-offs for the establishment and outfitting of new business sites that are directly related to the ongoing business of the company. Thus, it is possible to claim a capital cost allowance when building a new manufacturing plant, constructing a new hotel to an existing hotel chain, or building a new silo or storage building to augment the work of the existing structures on a commercial farm. This deduction is claimed on the annual tax return, allowing the company to receive partial credit that helps to offset the overall amount of taxes due for the period cited.

It is important to note that many countries allow capital allowances to be applied over several years. When this is the case, the company can claim a percentage of the total cost of the new building for several years in a row, with the final amount claimed to not exceed the actual cost of the building. In some countries, capital allowances can be claimed for one to three years in succession, while other countries allow the deduction to occur over a longer period of time.

With just about any regulations governing the calculation and submission of capital allowances, the rate at which the new structure can be claimed as a write-off depends on when construction of the building was completed. This means that even though construction of a building was begun in one calendar year and completed the following year, the building owners cannot claim a write-off for any expenditure related to the construction during that first year. However, the process of claiming capital allowances would begin after the building was finished, occupied, and functioning as part of the business operation.

The exact structure of capital allowances will vary from one country to another. When seeking to claim this type of allowance, it is important to understand current laws and regulations that apply to the jurisdiction where the tax return is filed. This means being familiar with laws that govern any claims involving a capital gains allowance as well as a capital cost allowance. Tax professionals such as accountants can help business owners understand how to calculate the allowance properly for each tax year under consideration.