Our employees built a machine for internal use. Can we deduct all their wages as payroll?
Building machinery for internal use normally creates an asset rather than an immediate payroll deduction for every employee hour.
By AE Tax Advisors Team · Updated October 28, 2026
Building machinery for internal use normally creates an asset rather than an immediate payroll deduction for every employee hour. Direct wages, materials and appropriate indirect costs must be evaluated for capitalization. Depreciation generally begins when the machine is ready and available for its assigned business use, not when fabrication starts.
A specific business-owner situation
Factory technicians spend three months constructing a custom assembly machine. Their pay remains wages for payroll purposes, but its income-tax cost recovery may follow the machine's basis.
Illustrative example, not a client result.
What to establish before filing
- Open a separate internal-project cost code.
- Allocate direct and applicable indirect costs.
- Document completion and readiness for use.
Which fact changes the answer?
Maintenance on an existing machine differs from producing a separate new asset. Define the project and property before deciding the recovery method.
A mistake to avoid
Payroll reporting and income-tax capitalization answer different questions.
Records that support the decision
- Employee project records.
- Parts invoices.
- Testing and commissioning reports.
The decision to document
Record the completed machine's supported tax basis and placed-in-service date without duplicating the capitalized wages as expenses.
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Related questions
- Our factory was idle for part of the year. Can we expense all overhead instead of allocating it to inventory?
- We moved finished goods to a separate warehouse. Do those storage costs belong in inventory?
Sources and editorial context
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.