What expense category is Repairs Expenses?

Keeping business property and equipment in good working order often involves incurring repair and maintenance costs. For accountants and Small to Medium-sized Business (SMB) owners, correctly identifying and categorizing these "repair expenses" is crucial. The key challenge lies in distinguishing a deductible repair from an improvement, which must be capitalized and depreciated. Getting this classification right is essential for accurate financial reporting and tax compliance.

This guide will explain the repairs expenses category, detail important considerations for classifying these costs (especially the repair versus improvement distinction), provide common examples, outline the tax implications according to IRS guidelines, and discuss how Fyle can streamline the tracking of these expenditures.

Repairs Expenses Category

Repairs expenses are costs incurred to keep your business property in its ordinary, efficient operating condition without materially increasing its value or substantially prolonging its useful life. These are generally considered operating expenses.

In an accounting system, these costs are typically classified under:

• Repairs and Maintenance
• Vehicle Maintenance/Repairs
• Equipment Repairs
• Building Maintenance/Repairs

The goal is to differentiate these from capital improvements, which enhance the asset's value, extend its life, or adapt it to a new use.

Some Important Considerations While Classifying Repair Expenses

Repair vs. Improvement - The Core Distinction

• Repairs: These are routine activities that keep your property in good working order. Examples include patching a small section of a roof, repainting a room, or fixing a broken part of a machine. These are generally expensed in the year they are incurred.
• Improvements: These costs must be capitalized and depreciated. An improvement falls into one of three categories:

1. Betterment: Fixes a material condition or defect, results in a material addition (like an expansion or increased capacity), or a material increase in productivity, efficiency, or quality of output.
2. Restoration: Involves replacing a major component or substantial structural part of the property, restoring it to a like-new condition after its useful life, or rebuilding it to a like-new condition after the end of its class life. Replacing an entire roof is an example.
3. Adaptation: Adapts the property to a new or different use that is not consistent with your ordinary use of the property when it was originally placed in service.

Routine Maintenance Safe Harbor

IRS Publication 535 outlines a safe harbor that allows you to deduct costs for routine maintenance on tangible property, even if they might otherwise seem like improvements. This applies to recurring activities that you expect to perform more than once during the property's class life (for most properties) or more than once during a 10-year period (for buildings and their systems) to keep the property in its ordinary efficient operating condition.

Costs Incurred During an Improvement Project

If a repair is performed as part of a larger project that is considered an improvement, the cost of that repair must generally be capitalized along with the overall improvement. For example, repairing holes in walls made to install new wiring during an electrical system upgrade would be capitalized.

Election to Capitalize Repair and Maintenance Costs

IRS Publication 535 and Publication 946 mention that a business can elect to capitalize amounts paid for repair and maintenance of tangible property, even if they don't improve the property, provided these amounts are also treated as capital expenditures on the business's books and records. This election, once made, applies to all such repair and maintenance costs for that tax year.

Detailed Invoices are Crucial

To support the classification of an expense as a repair, invoices should clearly describe the work performed. Vague descriptions like "general repairs" can be red flags during an audit. The invoice should detail what was fixed or maintained.

Recordkeeping

Maintain all supporting documents like invoices, paid bills, and canceled checks. These documents should identify the payee, amount paid, proof of payment, date incurred, and a clear description of the service received.

Examples of Repair Expenses

Here are some common examples of expenses that generally qualify as repairs:

Buildings & Grounds

• Repainting the interior or exterior walls of business buildings.
• Fixing plumbing leaks (but not replacing the entire plumbing system).
• Repairing broken windowpanes.
• Sealing cracks or leaks in walls or roofs.
• Patching or reconditioning floors (but not replacing them entirely).
• Cleaning and repairing roofs and gutters.

Machinery & Equipment

• Replacing short-lived parts of a machine to keep it in good working order, without improving it.
• Changing oil or other fluids to maintain business equipment.
• Repairing a specific malfunctioning component of a machine.

Vehicles

• Oil changes, tire rotations, tune-ups.
• Replacing spark plugs, brake pads, or tires.
• Repairing a flat tire or a broken headlight.

Tax Implications of Repair Expenses

Deductibility

Ordinary and necessary repair and maintenance costs that keep property in normal operating condition but do not materially increase its value or prolong its life are fully deductible as business expenses in the year they are paid or incurred.

Timing of Deduction

• Cash Method: Repair expenses are generally deductible in the tax year they are actually paid.
• Accrual Method: Repair expenses are generally deductible in the tax year they are incurred, provided the all-events test has been met and economic performance has occurred. Economic performance for repair services typically occurs as the services are provided.

Contrast with Improvements

Costs classified as improvements must be capitalized and recovered through depreciation over the asset's useful life, following MACRS rules as detailed in IRS Publication 946.

Recordkeeping for Substantiation

In case of an IRS audit, you must have adequate records, primarily detailed invoices, to support your claim that an expenditure was a repair rather than a capital improvement. The IRS recordkeeping guide emphasizes the need for documents that identify the payee, amount paid, proof of payment, date, and a description of the service.

Impact of Misclassification

Incorrectly expensing a capital improvement as a repair will understate taxable income in the current year but overstate it in future years due to the absence of depreciation deductions. Conversely, capitalizing a true repair will overstate current year income.

How Fyle Can Automate Expense Tracking for Repair Expenses

Tracking repair and maintenance expenses, ensuring proper documentation, and facilitating accurate classification can be streamlined with Fyle's expense management solution:

Efficient Invoice and Receipt Capture

Repair invoices and receipts can be quickly submitted to Fyle, whether by forwarding emails from vendors, using the mobile app to snap photos of paper documents, or through direct uploads. This ensures all documentation is captured promptly.

Real-Time Transaction Data

If repairs are paid using a corporate credit card linked to Fyle, the transaction details are captured in real-time, providing an immediate record of the payment.

Automated Reconciliation

Fyle helps match repair invoices and receipts with corresponding card transactions, simplifying the reconciliation process.

Clear Categorization

Businesses can define specific categories like "Equipment Repairs," "Building Maintenance," or "Vehicle Repairs" in Fyle. This allows for consistent categorization of repair expenses, making it easier for accountants to review and ensure correct GL coding.

Supporting Documentation for Classification

The detailed invoices attached within Fyle provide accountants with the necessary information to make an informed decision on whether an item is a repair (to be expensed) or an improvement (to be capitalized in the accounting system).

Policy Adherence

Companies can set policies in Fyle regarding repair authorizations, preferred vendors for maintenance services, or spending limits, with automated notifications for out-of-policy expenses.

Seamless Accounting Integration

Fyle integrates with popular accounting systems such as QuickBooks Online & Desktop, Xero, NetSuite, and Sage Intacct. This allows for the smooth export of categorized and documented repair expenses, ensuring timely and accurate updates to the general ledger.

Spend Visibility and Analysis

Fyle’s dashboards and reporting features allow businesses to track repair and maintenance spending across different assets, locations, or departments. This data can help identify trends, manage maintenance budgets, and inform decisions about repairing versus replacing assets.

By utilizing Fyle, accountants and SMBs can significantly reduce the administrative burden associated with managing repair expenses, improve recordkeeping for tax compliance, and gain better control over maintenance costs.