What are Major Repairs?

Major Repairs

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Major Repairs

Major repairs refer to extensive repairs that are not regularly recurring, extend the useful life of an asset, and/or improve its value or productivity. The costs associated with major repairs are usually capitalized as they are not simply maintaining the asset in its original condition, but rather enhancing the asset’s value or prolonging its life.

For example, replacing the roof on a building, overhauling a major machine component, or doing a complete refurbishment of an office space, are considered major repairs. These costs are then depreciated over the improved asset’s remaining useful life.

The differentiation between a major repair and a minor (or routine) repair is important for accounting purposes. While the costs of minor repairs are generally expensed in the period in which they are incurred, the costs of major repairs are capitalized and then depreciated over time. This distinction can have a significant impact on a company’s financial statements and tax obligations.

Determining whether a repair should be classified as minor or major can sometimes be complex and may require professional judgment. Consulting with an accounting professional can be beneficial in these cases.

Example of Major Repairs

Let’s say you own a company that operates a fleet of delivery trucks. Over time, these trucks require both routine maintenance and more substantial repairs.

  • Routine maintenance might include tasks like oil changes, tire rotations, and replacing brake pads. These are considered minor repairs or maintenance because they are done regularly, they keep the trucks running smoothly but do not significantly extend the trucks’ life or increase their value. The cost of these minor repairs is usually expensed in the period they are incurred.
  • Now, imagine that one of your trucks has a blown engine. Instead of just repairing the engine, you decide to replace it entirely with a more efficient and powerful one. This is a significant upgrade that will extend the life of the truck, improve its performance, and possibly increase its resale value. Therefore, this is considered a major repair. The cost of this engine replacement would be capitalized, meaning it would be added to the asset’s value on the balance sheet and then depreciated over the remaining useful life of the truck.

Remember, the distinction between a minor and major repair can sometimes be a gray area and require professional judgment. Always consult with an accountant or a financial advisor for guidance on these matters.

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