When you purchase an asset for your business, you may find it needs some repairs before it’s ready for use. A common question from owners is: Can I claim a deduction for these repair costs? The short answer is no—initial repairs are considered capital expenses and are not deductible for income tax purposes.
However, they can still impact your tax situation, so understanding the rules is important. The IRD have requested consultation on PUB000459 which deals with this question and provides useful examples for edge cases.
Understanding Initial Repairs vs. Deductible Repairs
Initial Repairs: If repairs are needed to bring an asset up to a standard where it can be used for its intended purpose, they are treated as capital expenses. You cannot claim them as a tax deduction, but you may add the costs to the asset’s value for depreciation purposes.
Ongoing Repairs: Once the asset is in use, any necessary repairs due to wear and tear may be deductible as operating expenses.
How IRD Determines Initial Repairs
The IRD applies a few key principles when deciding whether a repair is Initial or Ongoing in nature:
The repair must not be part of acquiring or improving the asset.
If the asset was in poor condition at purchase and needed repairs to function properly, those costs are capital.
Repairs made due to the prior owner’s lack of maintenance are considered part of the acquisition cost.
For example, if you buy a second-hand truck for your delivery business and need to replace tyres, fix rust damage, and repair the brakes before using it, these costs are not deductible. However, future maintenance of the truck, such as changing the oil or replacing worn-out tyres after regular use, would likely be deductible.
Depreciation: The Silver Lining
Although initial repairs aren’t deductible for tax, they aren’t a complete loss. If the asset is depreciable, you can add the repair costs to the asset’s total value and claim depreciation deductions over time. (Note: Buildings from 1 April 2024 have depreciaiton of 0%)
What This Means for Your Business
If you’re purchasing assets that immediately require repairs, it’s essential to plan ahead.
At Accountech, we specialise in making tax rules easy to understand for business owners. If you’re unsure about the classification of your expenses, we’re here to help you navigate the complexities of tax law in a way that makes sense.
Disclaimer: This blog post is for informational purposes only and should not be construed as professional advice. It is recommended to seek the advice of a qualified accountant or tax professional regarding your specific circumstances.