Yahoo Finance Repairs and Maintenance versus Capital Improvements
A frequently asked question is the difference between repairs and capital improvements. As with every other aspect of income tax law there can be grey areas as well as clear black and white answers. I will continue to talk generally to try and simplify this question.
The first thing to mention is the applicable costs must be business related (including rental properties). A salary and wage earner is not in business so can’t claim any costs. It is possible to have a business and be employed separately, in which case the costs claimable must still relate directly to the business.
The second point to mention is the $500 threshold. You can claim as an expense an improvement or asset under this amount. As an example, if you bought a cell phone for $499, even though it is an asset you can claim it immediately as an expense in the current financial year. Beware though that the limit applies to the complete installed asset. So you can’t buy a set of four chairs worth $200 each as an expense because the set is $800 in total. Also if you bought an air conditioner for $450 and it cost $150 to be installed then the total price is $600.
If the cost is business related and more than $500 then the next thing to determine is whether the cost is to restore an asset to your original purchase or whether the cost improves the asset. This is where many people get confused, especially rental property investors who buy a second hand house and do it up immediately before letting it. Because there has been no wear and tear since they bought the property, all initial work must be improvements and therefore capitalised. This has become more of an issue in recent years for buildings as there is no depreciation claim on these types of structures.
The longer that an asset is owned the more likely that it has worn and torn during this ownership period. If an asset is totally replaced then the new item is capitalised (and depreciated if allowed). If part of the asset is replaced then it is likely to be classed as repairs. A vehicle that has its tyres replaced after them wearing down while owned will be repairs. The grey area comes where there is a bit of both parts e.g. the vehicle engine dies after many years of ownership but is replaced by a new larger engine. It could be argued that it is a repair of part of the car, but it could also be argued that because the engine is larger than the original, that this is an improvement and therefore should be capitalised and depreciated.
The best advice I give is to discuss large transactions before they are done to best structure tax and cash flow consequences.
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Disclaimer:
Any views the writer has expressed are his own and not necessarily those of Accountants On Elliott LP. The information supplied has been written in general terms only. This information should not be relied upon specifically without also obtaining appropriate professional advice after detailed examination of your particular situation.
