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In which cases and to what extent are repair expenses deductible from income?
In which cases and to what extent are repair expenses deductible from income?
Fixed assets are among the most important factors for organizing the operations and generating income of any enterprise. Whether it is a building, equipment, or a vehicle, it is essential to keep them in proper working condition. This requires additional repair expenses. The question is: under what circumstances and in what manner can these expenses be deducted from income?
This issue is clarified by Nurlan Mustafayev.
The Tax Code provides a detailed framework for the accounting of repair expenses. The legislation precisely defines the limits of deductibility of these expenses, as well as the rules applied in cases of repair of leased assets.
1. Rules for deducting repair expenses
According to Article 115.1 of the Tax Code, the amount of annual repair expenses deductible from income is calculated as a percentage of the residual value of fixed assets at the end of the previous year. These percentages vary by category:
- Buildings, constructions, and structures: 2% of residual value;
-Machinery and equipment: 5%;
- High-tech computing equipment: 5%;
- Passenger cars and other vehicles: 5%;
- Trucks: 8%;
- Other fixed assets: 3%;
- Non-depreciable fixed assets: 0% (except for expenses incurred for land improvements).
The key point is that if actual repair expenses are less than the allowable limit, only the actual amount can be deducted. If actual expenses exceed the limit, only the limit amount is deductible, and the excess is added to the book value of fixed assets.
Example 1. Suppose the company’s year-end balance sheet shows:
Buildings — 400,000 AZN;
Vehicles — 200,000 AZN, of which 150,000 AZN are trucks and 50,000 AZN are passenger cars.
Actual repair expenses during the year: 10,000 AZN.
Calculation:
Buildings: 400,000 × 2% = 8,000 AZN;
Passenger cars: 50,000 × 5% = 2,500 AZN;
Trucks: 150,000 × 8% = 12,000 AZN;
Total limit = 22,500 AZN.
Since actual repair expenses (10,000 AZN) are less than the limit (22,500 AZN), the deductible amount will be 10,000 AZN.
If actual repair expenses were 30,000 AZN and the limit 22,500 AZN, then 22,500 AZN would be deductible, and the remaining 7,500 AZN would be added to the book value of fixed assets.
The advantage for businesses is that excess expenses are not lost but are capitalized and deducted gradually through future depreciation.
2. Repairs of leased fixed assets
Many companies rent buildings or equipment. In such cases, repair expenses also arise. The question is: who covers these costs, and are they deductible?
According to Article 115.5 of the Tax Code, the terms of lease, including repair expenses, are determined by the agreement between the lessor and lessee.
If repair expenses are offset by the lease fee or covered by the lessor, they are not deductible. If expenses are incurred by the lessee but not reimbursed by the lessor or included in the rent, Article 115.6-1 applies. Under this article, if leased fixed assets are not recorded on the lessee’s balance sheet, or repairs are carried out at the lessor’s expense, or offset by the rent, the provisions of Article 115.4 do not apply to the lessee. In such cases, expenses are amortized over the lease term, but not less than five years, and deducted proportionally from income.
Example 2. In 2024, a company spent 100,000 AZN on repairs of a leased property not recorded on its balance sheet. The lease term is 10 years. The expenses were neither included in the rent nor reimbursed by the lessor.
100,000 ÷ 10 = 10,000 AZN.
Thus, the company may deduct 10,000 AZN of repair expenses annually.
3. Special notes and important considerations
If the residual value of fixed assets at year-end is zero, the actual repair amount is added to their book value and depreciated in future periods. The limitation on deductibility of repair expenses applies only for tax accounting purposes. This does not restrict the company from carrying out larger repair works at its own expense.
If repair expenses are not properly documented (e.g., receipt, invoice, contract), the right to deduct them may be lost.
It should also be noted that the deductibility of repair expenses is not only a technical tax rule but also an important tool for financial planning. Companies can immediately reduce their tax burden by deducting repair expenses within the limit, while excess amounts are capitalized and gradually expensed through depreciation. In the case of leased assets, properly defined contractual terms can completely change the accounting treatment of repair expenses.
Conclusion: with proper accounting and planning, companies can ensure both financial transparency and tax optimization.
Fixed assets are among the most important factors for organizing the operations and generating income of any enterprise. Whether it is a building, equipment, or a vehicle, it is essential to keep them in proper working condition. This requires additional repair expenses. The question is: under what circumstances and in what manner can these expenses be deducted from income?
This issue is clarified by Nurlan Mustafayev.
The Tax Code provides a detailed framework for the accounting of repair expenses. The legislation precisely defines the limits of deductibility of these expenses, as well as the rules applied in cases of repair of leased assets.
1. Rules for deducting repair expenses
According to Article 115.1 of the Tax Code, the amount of annual repair expenses deductible from income is calculated as a percentage of the residual value of fixed assets at the end of the previous year. These percentages vary by category:
- Buildings, constructions, and structures: 2% of residual value;
-Machinery and equipment: 5%;
- High-tech computing equipment: 5%;
- Passenger cars and other vehicles: 5%;
- Trucks: 8%;
- Other fixed assets: 3%;
- Non-depreciable fixed assets: 0% (except for expenses incurred for land improvements).
The key point is that if actual repair expenses are less than the allowable limit, only the actual amount can be deducted. If actual expenses exceed the limit, only the limit amount is deductible, and the excess is added to the book value of fixed assets.
Example 1. Suppose the company’s year-end balance sheet shows:
Buildings — 400,000 AZN;
Vehicles — 200,000 AZN, of which 150,000 AZN are trucks and 50,000 AZN are passenger cars.
Actual repair expenses during the year: 10,000 AZN.
Calculation:
Buildings: 400,000 × 2% = 8,000 AZN;
Passenger cars: 50,000 × 5% = 2,500 AZN;
Trucks: 150,000 × 8% = 12,000 AZN;
Total limit = 22,500 AZN.
Since actual repair expenses (10,000 AZN) are less than the limit (22,500 AZN), the deductible amount will be 10,000 AZN.
If actual repair expenses were 30,000 AZN and the limit 22,500 AZN, then 22,500 AZN would be deductible, and the remaining 7,500 AZN would be added to the book value of fixed assets.
The advantage for businesses is that excess expenses are not lost but are capitalized and deducted gradually through future depreciation.
2. Repairs of leased fixed assets
Many companies rent buildings or equipment. In such cases, repair expenses also arise. The question is: who covers these costs, and are they deductible?
According to Article 115.5 of the Tax Code, the terms of lease, including repair expenses, are determined by the agreement between the lessor and lessee.
If repair expenses are offset by the lease fee or covered by the lessor, they are not deductible. If expenses are incurred by the lessee but not reimbursed by the lessor or included in the rent, Article 115.6-1 applies. Under this article, if leased fixed assets are not recorded on the lessee’s balance sheet, or repairs are carried out at the lessor’s expense, or offset by the rent, the provisions of Article 115.4 do not apply to the lessee. In such cases, expenses are amortized over the lease term, but not less than five years, and deducted proportionally from income.
Example 2. In 2024, a company spent 100,000 AZN on repairs of a leased property not recorded on its balance sheet. The lease term is 10 years. The expenses were neither included in the rent nor reimbursed by the lessor.
100,000 ÷ 10 = 10,000 AZN.
Thus, the company may deduct 10,000 AZN of repair expenses annually.
3. Special notes and important considerations
If the residual value of fixed assets at year-end is zero, the actual repair amount is added to their book value and depreciated in future periods. The limitation on deductibility of repair expenses applies only for tax accounting purposes. This does not restrict the company from carrying out larger repair works at its own expense.
If repair expenses are not properly documented (e.g., receipt, invoice, contract), the right to deduct them may be lost.
It should also be noted that the deductibility of repair expenses is not only a technical tax rule but also an important tool for financial planning. Companies can immediately reduce their tax burden by deducting repair expenses within the limit, while excess amounts are capitalized and gradually expensed through depreciation. In the case of leased assets, properly defined contractual terms can completely change the accounting treatment of repair expenses.
Conclusion: with proper accounting and planning, companies can ensure both financial transparency and tax optimization.