Guidance on deductions for businesses for COVID-19 related costs

With most water cooler conversations still ending with COVID-19 related comments Inland Revenue have decided to re-join the conversation by publishing guidance on what COVID-19 related costs can be deducted by a business.

The 24-page Interpretation Statement steps through how the ordinary deductibility principles apply to COVID-19 related costs.

Under the ordinary principles, whether a cost is deductible depends on its relationship (or nexus) with the business and the way the business earns its income. A cost will be deductible where it has a relationship with the way the business earns its income, and also where it is not disallowed by one of the general limitations (such as the capital limitation).

Inland Revenue have identified some specific deductible costs that a taxpayer will likely have incurred as a result of the COVID-19 outbreak. The costs addressed, include:

• Employee costs (such as relocation costs, retainers, incentive payments, redundancy payments)
• Costs to terminate contracts and related legal fees
• Asset and equipment costs (such as R&M, depreciation, security)
• Premises expenses (such as costs for physical distancing)

The guidance also includes examples which we expect are intended to cover a range of businesses known to have been adversely affected by COVID-19. These include a hotel chain, a café, a construction company, a jetboat operator and a web company.

In summary, the statement does not include any ground-breaking new information but does provide some certainty and helpful guidance for taxpayers that are likely counting every tax deduction.

Note that separate guidance was published in June 2021 which covered the income tax and GST treatment of deductions for businesses disrupted by COVID-19. If a business has downscaled or stopped operating because of the COVID-19 pandemic the applicable guidance is Interpretation Statement 21/04.

Please contact your Nexia advisor if you would like to discuss this any further.