A word before the detail
Tax rules change, thresholds are adjusted and your own situation, such as GST registration, business structure and how assets are used, affects the answer. This guide explains the general ideas so you can have a better conversation with your accountant and keep the right records. It is not tax advice, and Inland Revenue's own guidance and your accountant's view take priority over anything here.
The most useful thing an IT provider can do in this area is give you clean, itemised invoices with clear descriptions and dates. That makes the accountant's job easier and reduces the chance of something being coded to the wrong place. If your invoices currently arrive as a single line reading IT services, ask your provider to itemise hardware, software, labour and ongoing services separately from now on.
Running costs are generally expenses
Ongoing costs of keeping IT working are typically treated as business expenses. That usually includes monthly IT support fees, software subscriptions such as Microsoft 365 or an accounting package, internet and phone plans, cloud hosting, domain name renewals, and repairs that restore equipment to working order rather than improving it. These are generally deducted in the year they are incurred.
Where a cost is shared between business and private use, such as a mobile plan or a home internet connection used for work, only the business portion is normally claimable, and you may need a reasonable basis for working out that portion. Keep notes on how you arrived at it. Sole traders and small companies in particular often mix personal and business devices, so a simple written record of the split can save time and argument later.
Equipment is usually depreciated
Computers, servers, network equipment, printers and similar items that last several years are generally treated as assets. Rather than deducting the full price in the year of purchase, the cost is spread over the asset's useful life using depreciation rates set by Inland Revenue for each type of asset. Your accountant will know the applicable rates and methods and how they apply to your mix of equipment.
There is generally a low-value asset threshold, below which an item can be deducted in full in the year it is bought rather than depreciated. The threshold has changed over the years, so check the current figure with your accountant. Be aware that buying several items that work together as one system can affect whether the threshold applies.
Software, development and upgrades
Software bought outright, as opposed to subscribed to, may be treated as an asset and depreciated, while subscriptions are usually an expense. Custom software or a significant system implementation can be more complex, especially where you pay for development, data migration and training together. Ask your provider to split those elements on the invoice, because they may be treated differently.
Upgrades are another grey area. Replacing a failed hard drive in an existing laptop is usually a repair, while adding capability that extends the life or value of an asset may be treated as capital. When in doubt, describe what was done on the invoice in plain words and let the accountant decide. Avoid vague descriptions such as sundry IT, which make it hard for anyone to classify the spending months later.
Leases, disposals and GST
Lease or rental payments for IT equipment are often treated as expenses, but the treatment depends on the type of lease and its terms, so ask your accountant to look at the agreement before you sign. When you sell, scrap or donate old equipment, there may be a gain or loss to account for against its depreciated value, so keep a record of what happened to every disposed asset.
If your business is GST registered, you generally claim GST on IT purchases and subscriptions through your returns, provided you hold valid tax invoices. Overseas subscriptions may be charged differently, so make sure your accounting records capture the GST correctly. Your accountant can confirm how GST applies to software and services bought from offshore suppliers, which are increasingly common in a small business's subscription list.
Records that make this easier
Keep an asset register that lists each piece of equipment, its purchase date, cost, supplier and where it is now. Your IT provider's inventory is a good starting point, but the finance version needs costs and dates. Store invoices and lease agreements where they can be found later, ideally attached to the transaction in your accounting software.
Review the register once a year with your accountant before year end. Retired equipment still on the books and new equipment never recorded are both common, and correcting them is far easier at year end than during a review. A matching update to your IT inventory at the same time keeps the technical and financial records in step, which also helps if you ever sell the business or face questions from an insurer.
In short
- Running costs such as support and subscriptions are generally expenses.
- Longer-lived equipment is usually depreciated over its useful life.
- Low-value thresholds and depreciation rates change, so confirm current figures.
- Itemised invoices and an asset register make your accountant's job easier.