The IRS allows businesses to elect costs that can be deducted or capitalized. Deductions are done by subtracting the cost of a business expense from income in either the year the cost is incurred or the year the cost is paid. If a cost is capitalized, a business may recover it over a period of time through deductions for amortization, depletion, or depreciation.
In this article, we will cite some specific deductible costs and capital improvement costs that are directly related to maintenance operations and how the IRS allows businesses to recover those costs.
Note: For complete IRS rules that apply to maintenance, visit IRS publication 535. Also note that requirements continue to change and that a good CPA may be the best reference.
Repair and maintenance costs
Amounts paid for repairs and maintenance to tangible property can be deducted if the amounts paid are not required to be capitalized. However, a business may elect to capitalize amounts paid for repair and maintenance depending on their own internal policies for handling books and records. Accounting and tax specialists review both minor and major repairs that are made to capital assets. Minor repairs may be deducted immediately and major repairs or improvements may be depreciated over time.
Depreciation is the process of spreading the cost of an asset over its useful life. This method of recovering costs is used for tangible assets like buildings, vehicles, and manufacturing equipment.
See our blog post titled Why Asset Depreciation Matters for Maintenance Teams for additional info on depreciation and how UpKeep can help maintenance and finance teams track depreciation.
Retired asset removal costs
The IRS states that If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair.
In our article on work orders, we use the example of Food Packer ABC that is required to install a new packaging line. However, prior to installation, the maintenance team first needs to hire a third party mover to remove an old piece of equipment to make space. Following the rule on retired asset removal costs, the cost of service for hiring the third party may be deductible.
Barrier removal costs
Businesses may elect to deduct costs of making a facility or public transportation vehicle more accessible and usable by those who are disabled or elderly. Examples of these are costs associated with the installation of ramps, elevators, and symbols of accessibility.
There are limits to the amount that can be deducted and the barrier removal must meet certain guidelines and requirements under the American Disabilities Act (ADA) of 1990.
IRS provides ways to determine whether repairs should be deducted or classified and depreciated over a certain number of years. A unit of tangible property is improved only if the amounts paid are for betterment, restoration, or adaptation of a unit of property. The characteristics of each are summarized below as defined by the IRS:
- Amounts paid to fix a material condition or material defect that existed before the acquisition or arose during production of the unit of property; or
- Amounts paid for a material addition including a physical enlargement, expansion, extension, or addition of a major component to the property; or
- Amount paid for a material increase in capacity, including additional cubic or linear space, of the unit of property; or
- Amounts paid that are reasonably expected to materially increase productivity, efficiency, strength, quality, or output of the unit of property where applicable
- Replacement of a major component or substantial structural part
- Recognition of gains or losses and basis adjustments
- Deterioration to the state of disrepair
- Rebuilding to like-new condition
- An amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with your ordinary use of the unit of property at the time you originally placed it in service
The role of maintenance in finance
Maintenance can help finance keep track of possible deductions and capital improvements through:
- Detailed and timely communication: define the purpose of purchases of goods and services, when they are needed, how much are needed, or how long they are needed
- Proper documentation and submission of records: keep and share records of purchases, proof of deliveries, and invoices; forward them to accounting for backup
- Use of CMMS to centralize data: use of a CMMS like UpKeep can eliminate redundant data entry, provide easier accessibility of data to all involved teams, and reduce expenses by eliminating the need for additional asset management software