Key Insights About IRS Regulations for Maintenance Teams: Repairs and Maintenance Tax Deductions

When tax time rolls around, it’s important to have an understanding of which of your business expenses can be deducted. Large repair and maintenance expenses typically have to be capitalized — or depreciated over several years rather than being taken as a deduction — but some IRS regulations may allow you to claim these expenses if you meet certain requirements.

If you find yourself confused about which expenses you can use to lighten your tax burden, UpKeep is here to help. In this article, we will explain some specific deductible and capital improvement costs related to maintenance operations and how the IRS allows businesses to recover those costs.

The Basics of Repairs and Maintenance Expense Taxes

The IRS allows businesses to elect costs that can be deducted or capitalized. 

Deductions subtract 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.

Note: For a complete list of IRS repairs and maintenance rules, check out publication 535. Also, since these laws can be complicated and the requirements continue to change, you’ll probably want to consult a CPA.

What Does the IRS Consider To Be Repairs and Maintenance?

According to the IRS, routine maintenance is any activity intended to keep assets operating efficiently with normal use. It’s what keeps assets in good working condition, but it doesn’t increase their value or extend their lifespans. 

Take changing the oil in a vehicle, for example. This is considered routine maintenance because it keeps the vehicle operating normally without increasing its value, so this expense can be deducted.

Which Parts of Maintenance Are Tax-Deductible?

Repair and Maintenance Costs

Money 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 its 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.

UpKeep’s EAM (enterprise asset management) software can help maintenance and finance teams follow and understand depreciation by storing all asset-related data in one place for easy tracking.

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, you may capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair.

Here’s an example.

Imagine that Food Packer ABC is required to install a new packaging line. However, before installation can begin the maintenance team needs to hire a third-party mover to take out an old piece of equipment and make space for the new purchase.

According to the rule on retired asset removal costs, the money spent hiring the third party may be deductible.

Barrier Removal Costs

Businesses may elect to deduct the 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.

Note that there are limits to the amount that can be deducted and the barrier removal must meet certain guidelines and requirements under the Americans With Disabilities Act (ADA) of 1990.

Which Parts of Maintenance Qualify as Capital Improvements?

If repairs and maintenance can’t be deducted, they may be classified as depreciations over a certain number of years. A unit of tangible property is improved only if the amounts paid are for the betterment, restoration, or adaptation of a unit of property. 

Let’s get back to our earlier example of the vehicle we’re maintaining. If we decided to replace its transmission, we have now prolonged its lifespan. This means the cost of replacing the transmission can be capitalized.

The characteristics of each category of improvements are summarized below as defined by the IRS.

Betterment

The following maintenance and repairs qualify as betterment:

• Amounts paid to fix a material condition or material defect that existed before the acquisition or arose during production of the unit of property
• Amounts paid for a material addition including a physical enlargement, expansion, extension, or addition of a major component to the property
• Amounts paid for a material increase in capacity, including additional cubic or linear space, of the unit of property
• Amounts paid that are reasonably expected to materially increase productivity, efficiency, strength, quality, or output of the unit of property where applicable

Restoration

The following maintenance and repairs qualify as restoration:

• 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

Adaptation

Adaptation is an amount paid to adapt a unit of property to a new or different use if the adaptation is not consistent with your intended use of the unit of property at the time you originally placed it in service.

The Role of Maintenance in Finance

Maintenance and finance teams don’t need to be entirely separate entities. With the right software, they can work together to make navigating repairs and maintenance tax deductions easier.

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, the quantity 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 the accounting department for backup.
• Use of a CMMS to centralize data: The 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.

UpKeep Is the #1 CMMS Used by Maintenance Teams

Tax time doesn’t have to be a burden when you have all the information you need in one place with CMMS software from UpKeep. Not only can UpKeep help you keep track of asset management, but we’ll also give you tools to handle:

• Work order management
• Preventive maintenance
• Parts and inventory
• Analytics
• And more

When you choose UpKeep, you are investing your time and resources. That’s why we commit to providing value, ensuring success, and fully supporting your needs.

Click below to start a free trial or request a demo today.