It’s important to know the difference between office supplies and office expenses because these costs are handled differently on your business tax return and affect your business taxes differently.
- 1 What are office supplies?
- 2 What are office expenses?
- 3 Personal use of office supplies and expenses
- 4 Office supplies and expenses: what you can deduct
- 5 deduction vs. Depreciation of office expenses
- 6 Supplies in other business categories
- 7 Office supplies and expenses on your business tax return
What are office supplies?
Office supplies they are the traditional office supplies such as pens, staplers, paper clips, USB flash drives and printer ink cartridges that employees use. Also included in office supplies:
- Maintenance of supply records, such as invoices and sales receipts.
- Janitorial and cleaning supplies
- Toilet paper
- Places to keep supplies, such as repair cabinets and storage cabinets
- Paper plates, paper towels, and plastic utensils.
- Drinks for the employee break room.
The IRS also includes postage on office supplies, but large amounts of postage for shipping products are classified differently (in cost of goods sold, as described below).
What are office expenses?
Office expenses are the other expenses of running an office. These expenses are used for office operations, which is why they are often called “office operating expenses.”
Office operating expenses include:
- Website services, cloud services (such as Dropbox or iCloud)
- Internet hosting fees and maintenance of websites, domain names, monthly costs of applications (such as Dropbox)
- Software, including web-based software such as QuickBooks products
- Desktops, Laptops, iPads, and Tablets
- Office phones and office phone systems
- Cell phone expenses for employees
Some higher-cost office expenses actually become business equipment, and these are classified as assets and depreciated (taken as an expense over a period of time).
If you have a home office, you may need to deduct some office equipment in a different way to separate home use and business use. For example, your home phone is not deductible, but long distance calls for business use may be. See this article on home business deductions for more details.
Personal use of office supplies and expenses
To deduct office supplies or equipment on your business tax return, you must be able to show that they are “ordinary and necessary” business expenses, not personal expenses. Personal expenses are not business expenses and cannot be deducted. For example, if you use the copier and office binder to produce a school report for your child, that’s personal use, and those costs should be kept out of your business tax return.
Some office equipment may be listed property. TThis is a property that can be used for both business and personal purposes. For example, if you own a video recorder purchased by your business and use it for both business and personal video, you’ll need to keep good records to separate business and personal use and can only deduct business use.
Cell phones, computers, and printers are no longer listed as property, but you still need to keep records that separate business and personal use and be able to show that you used these items more than 50% of the time for business purposes.
Office supplies and expenses: what you can deduct
You can deduct 100% of the cost of office supplies and supplies you have on hand and used during the year. You will also be able to deduct the cost of postage and postage stamps and expenses used on postage stamps during the year. To deduct office supplies on your business tax return, you must meet all of these IRS rules:
- You do not keep track of when they are used.
- You do not take inventory of these items.
- Deducting these items doesn’t distort your income (in other words, you’re not taking so many deductions that your income is much less than it otherwise would be).
You can only deduct the costs of supplies and materials used in the current year. In other words, you can’t just buy a large quantity of copy paper at the end of the year and consider it an expense in that year, since there’s no way you can use it all for the year. Consult with your tax professional on how to determine an amount for this expense.
deduction vs. Depreciation of office expenses
It used to be that all business assets (items used for more than a year) costing more than $500 had to be depreciated. Depreciation is a way of spreading the cost of a business asset over the useful life of that item. Each year you deduct that year’s share of the cost.
The IRS has a new, simpler method for taking lower-cost assets as expenses instead of depreciating them. Starting in 2016 and later, you can deduct business assets (including office assets) that cost $2,500 or less. This includes software and software suites, laptops, tablets, smartphones, and other smaller electronic devices. The cost you can spend includes the cost of buying and setting up the item.
To take the cost of this item as a deduction, you must also treat it as an expense in your accounting system.
If office supplies, expenses, or equipment cost more than $2,500, they become depreciable assets and you must depreciate them (spread the cost over time).
Keep records to prove deductions
You don’t have to submit your business records to the IRS with your business tax return every year, but you do need to have good records to prove the office supplies and office operating expenses you take as deductions or depreciation.
Supplies in other business categories
Office supplies in cost of goods sold
The supplies you use in a warehouse or to ship products are different from the supplies you use in your office. The supplies and materials you use to produce products are included in the cost of goods sold. Cost of goods sold is a calculation on your business tax return that looks at inventory changes during the year and everything you spend to make and ship products to your customers.
Supplies in cost of goods sold include:
- Supplies that physically become part of the item you are selling are included in inventory as part of the calculation.
- Supplies you use to ship products, such as packing materials, shipping tape, and labels
Office supplies and equipment in start-up costs
If you’re stocking up on office supplies and purchasing office equipment, computers, and software as part of starting up your business, you’ll need to keep a separate record of these costs. Start-up costs should generally be depreciated, but you can take up to $5,000 of start-up expenses and up to $5,000 of organizational expenses during your first year of business.
Office supplies and expenses on your business tax return
For sole proprietors and single member LLCsshow office supplies in the “office supplies” category of Schedule C on line 18. You can include office expenses less than $2,500 in this category or you can separate office expenses and include them with “Other expenses” on the line 27a.
For partnerships and multi-member LLCs, show these expenses in the “Other deductions” section of Form 1065 (line 20). You must attach a separate statement itemizing the different deductions included in this item.
For corporations, show these expenses in the “Other Deductions” section of Form 1120. First, you must include a statement that lists the deductions, then include the total in “Other Deductions,” line 26.