Posted by The TaxAdvocate Group, LLC

Business Supplies and Equipment: Handling Tax Deductions

Business Supplies and Equipment: Handling Tax Deductions

The presence of business equipment and supplies gotten for tax purposes might make things a little complicated when it comes to filing a business tax return. These two business purchases are handled differently for tax purposes.

It is possible to expense purchases of smaller amounts while equipment purchases need to be depreciated (spread through time).


Supplies and Equipment for Business Use Only 

Firstly, these purchases are targeted for business use, not personal purposes. 

As a result, supplies like staple pins cannot be used personally. Even though this differentiation seems unimportant, any audit from Uncle Sam might prevent you from deducting such purchases if it cannot be proved that they are targeted for business use. 

All business equipment that one can use for both business and personal needs are known as listed properties. One might be able to deduct a particular percentage of the cost provided one can prove the amount used for business.

While it is recommended to use a business account or credit card to purchase business supplies, it does not prove such as business expense. 


Comparing Depreciation and Expensing

The primary and most essential thing to bear in mind when considering the major difference that exists between business equipment and supply is that a piece of equipment is a long-term asset while a supply is a short-term asset.

Short-term assets are exhausted within a year or less, while long-term business assets are used over many years. 


Deduct Expenses for Supplies

Since it is assumed that supplies are consumed in the year they were gotten, you will list the cost of supply as short-term (or current asset), an expense on your business's income statement. This will be applied as deductions on the tax for the year you got them. 


Depreciate Expenses for Equipment 

Since the use of business equipment spans over several years, such equipment's value is classified as a long-term asset on your balance sheet. For such, the cost will be depreciated over time.

Uncle Sam has various names for depreciating and deducting. They might refer to deducting as expense, which means taking a deduction for an expense. Also, rather than depreciating, they might use the term capitalizing, which means to spread the cost of a capital asset through time. 


Defining Business Supplies

Business supplies are items you got, used, and exhausted in a year. Common business supplies are typical office supplies like sticky notes, pens, supplies for copiers, and other office machines. 

For supplies used in products that you produce or sell, like shipping and packaging supplies, the treatment of such materials is different for tax purposes. 

Supplies with which you packaged, produced and shipped your product are classified as inventory and considered in Costs of Goods Sold calculation.

For the purpose of accounting, business supplies are classified as current assets. As a result, purchases for business supply will be deducted from the Deduction or Expense section's business tax return. 


Defining Business Equipment

All tangible properties used for business are called business equipment. They are pretty permanent because they last longer compared to supplies. Sample equipment is furniture, machinery, computers, vehicles, office machines, electronic devices, etc. Any business land or building is not classified as equipment.

Equipment purchase is not treated as an expense in a year. However, the expense is distributed over the useful life of such equipment in a process called depreciation. 


Taxes Applied to Sale of Business Equipment 

Any gains or losses from the sale of a capital asset like business equipment are handled in a particular way, judging from an accounting and tax perspective. Whatever gain or loss that comes from such a sale is not taxed at the income tax rate. The rate depends on the number of years the asset has been sold, even though it is typically 15%.


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