Business equipment versus supplies for tax deductions

When it comes time for a business owner to complete business tax forms, it can be a bit confusing trying to understand how to handle equipment and supplies purchased for business purposes. These two types of purchases are treated differently for accounting and tax purposes.

Some purchases, especially smaller ones, can be expensed, while other purchases, usually equipment, must be depreciated (spread over time).

Equipment and supplies for business use only

First, please note that these purchases are for business purposes only, not for personal use.

Supplies, such as printer paper, may not be used for personal purposes. While this doesn’t seem like an important distinction, an IRS audit might find these purchases non-deductible if you can’t prove their use as a business expense.

Business equipment that can be used for both personal and business purposes is called listed property. You may be able to deduct a certain percentage of the cost of business equipment if you can prove the amount of business use.

Use your business credit card or bank account when purchasing business equipment and supplies. However, the purchase method alone does not prove its use as a business expense.

expenses vs. Depreciation

The most important thing to remember about the difference between business supplies and business equipment is that supplies are short-term or current assets and equipment is a long-term asset.

Current assets are those assets that are used in a year (more or less), while long-term assets are used over several years. Yes, copy paper can sit on a shelf for over a year, but this is just a general guideline for classifying assets for tax purposes.

Deduct supplies expenses

Since the supplies are supposed to run out within the year of purchase, the cost of the supplies as current assets is included as an expense on your business’ P&L statement and is taken as a deduction on your business taxes. in the year they are purchased.

Equipment depreciation expense

Since the equipment can be used for a longer period of time, the value of this equipment is classified as a long-term asset on the balance sheet and the cost is depreciated over time (taken as a deduction in increments over the useful life). of the team). team).

The IRS has different names for deduct and depreciate. Instead of “deduct,” they say “spend,” which means taking a deduction for an expense. Instead of “depreciate,” they say “capitalize,” which means spread the cost of capital assets like equipment over time.

What are business supplies?

Business supplies are items that are purchased and typically run out during the year. The most common types of business supplies are office supplies, including staplers, sticky notes, highlighters, and supplies used to run copiers, printers, and other office machines.

If you are purchasing supplies for use in the products you make or sell, including packaging and shipping supplies, these supplies are handled differently for accounting and tax purposes.

Supplies to manufacture, ship, and package products are counted as inventory and are part of the cost of goods sold calculation. At the end of a year, an inventory of these supplies is taken as part of this calculation.

For accounting purposes, business supplies are considered current assets. Purchases of business supplies are deducted from your business tax return under the “Expenses” or “Deductions” section.

What is the commercial team?

Business equipment is tangible property used in a business. Equipment is considered more permanent and durable than supplies, which run out quickly. Equipment includes machinery, furniture, fixtures, vehicles, computers, electronic devices, and office machines. Equipment does not include land or buildings owned by a company.

The purchase of equipment is not expensed in a year; rather, the expense is spread over the useful life of the equipment. This is called depreciation. From an accounting point of view, equipment is considered capital goods or fixed assets, which are used by the company to make a profit.

Sales Tax on Business Equipment

Gains or losses on sales of capital assets, including equipment, are handled differently, both from a tax and accounting standpoint, than a business’s regular sales revenue. The gain or loss on the sale is subject to capital gains tax, levied at a different rate than income. The rate depends on how long the asset has been sold, but generally does not exceed 15%. You must report capital gains on Schedule D of your tax return.

New way to deduct lower cost equipment

While business equipment, like other business property, generally must be depreciated, you may be able to deduct the full cost of business equipment in some circumstances. This deduction is called de minimis safe port, which means it is an exception for small quantities. Here are the requirements:

If your business has what the IRS calls an “applicable financial statement,” you can take a business tax deduction in the year you purchased the equipment for amounts paid for business equipment up to $5,000 per item, with an invoice.

If your business does not have an applicable financial statement, you can take a business tax deduction of $2,500 per item, with an invoice, in the year you purchased the equipment.

You must also notify the IRS on your tax return that you are taking this deduction.

Tax issues are always tricky, and depreciation and capital gains top the list. This article is an overview, not tax or legal advice. Get help from a tax professional to depreciate equipment or file capital gains taxes.

Related Articles