Ready for a tax-mazing fact? There are more items deducted as Supplies on Schedule C Line 22 than anywhere else on the return. This tax-fastic observation often comes as a surprise to business owners and taxation students. Many purchases assumed deductible elsewhere (because, well… it just makes sense) are Supplies deducted on Line 22. How many business owners are aware of this fact? Few. How many goof up their tax returns as a result? A lot!
In this article, drawn from our Real Estate Agent Tax-Cut Library, we’ll straighten out this common misconception by sharing the IRS definition of supplies as it applies to Schedule C. Then, we’ll add an exhaustive, but not inclusive, list of items deducted on Line 22 (which will then be immediately qualified by items not deductible as Supplies).
What are Supplies? The IRS definition of Supplies is not found in the instructions of Schedule C (hence the confusion?). But, never the less, Supplies are items purchased and consumed for business; stuff that gets used up and replaced as you get things done. Many procurements that resemble office expenses are deducted as Supplies, as are a few promotional purchases. Here’s a brief list of commonly deducted Supplies:
- Business cards
- Business letterhead & custom envelopes
- Toner & printer ink cartridges
- Paper towels for general use
- Tissues & toilet paper
- Staplers & staples
- Dry-erase & bulletin boards
- Mileage logs & appointment books
- Copy Paper
- File folders
- Manilla envelopes
- Basic power strips & extension cords (expensive battery backups & surge protectors may require depreciation).
- Computer tote or backpack
- Notepads (unless customized and used as giveaways – these are an advertising expense)
- Pens (unless customized and used as giveaways – these are an advertising expense)
- Blank labels & return address labels
- Penholders & organizers for desks
- Light bulbs
- Receipts, accounting & sales ledgers
Items that are Not Supplies: Now that we’ve shared the logic of what constitutes a deductible, let’s turn the tables and share a handsome handful of supply-like expenses that get elsewhere on Schedule C:
- Supplies and Materials directly related to the production of items that are resold (such as wood and screws used in manufacturing a kitchen cabinet for resale) are not deductible as Supplies on Line 22. These costs get included in Cost of Goods Sold, which located in Part III on page two of Schedule C. Few, if any, service businesses incur Cost of Goods Sold.
- Computer software is not a supply. Inexpensive, off-the-shelf software gets reported as an Office Expense. If specialized and costly (over $500 or $2,500 depending on your business expense policy), the software may require depreciation.
- Chair mats that protect flooring are an Office Expense.
- Inexpensive Office Décor is an Office Expense.
- Cleaning supplies (believe it or not) are also an Office Expense, not Supplies and not Repair and Maintenance.
- Kitchen utensils for employee use (such as disposable plates, cups, knives, and forks) get deducted as an Office Expense.
- Assets that have a useful lifespan of more than one year and cost over $500 or $2,500 (depending on business expense policy) may require depreciation.
- Deduct Business-related publications (such as professional magazines) for you and your employees as an Other Expense on Line 27.
- Publications for customers (such as in a waiting room) get deducted as an Office Expense.
When Can You Deduct Office Supplies? For the most part, incidental supplies are deductible in the year of purchase. Stocking up near year’s end is also deductible if 1) You do not track supplies as they get consumed, 2) The purchases are reasonable given the nature of your business, and 3) Your business does not inventory such items at the beginning or end of the year.
Maxing the Supplies Deduction: Supplies include many small, easily overlooked or forgotten purchases that add up quickly. Remember: Every $100 worth of deductions saves the average Real Estate Agent over $30! Overlooking these expenses is a tax-costing shame. To maximize your tax savings, follow these cost-tracking tips.
- Pay for Business Items Separately: Sure, it’s a hassle to pull file folders and a box of staples from your grocery cart at check out. Waiting customers will sigh and roll their eyes as you dig through boxes of Kleenex and frozen peas to make a separate purchase. Does this deduction-losing rationalization sound familiar? “I’m in a hurry. Those folks waiting behind me are in a hurry too. I’ll pay for everything from my personal account. Then, when I get home, I’ll circle the business purchases and put the receipt in an envelope.” How often does the average business owner follow through with this plan? Most forget by the time they get home. Many who remember will circle the business items, soon misplace the receipt. A few tattered receipts will find their way to an envelope that will be MIA come tax-time. Don’t rationalize losing money - keep the deduction! Endure a few moments of being self-conscious and pay for business items separately.
- Use Your Business Checking Account or Credit Card: Complete your business purchases by using your business bank account or business credit card. Doing so streamlines recordkeeping and provides additional evidence to help substantiate each expense.
- Read our Article, Proving Your Deductions, Easy Recordkeeping for Real Estate Agents: As the title says, this article provides advice on simple recordkeeping that will NOT lose deductions.
- No Home Office - Supplies Still Deductible: Many business owners believe that lacking a qualified home office means that supplies used in that office are not deductible; this belief is incorrect. Many of the materials listed above remain deductible when purchased and consumed for business.
A Word of Warning: As we near the end of this article, let’s discuss a couple of situations to steer clear of:
- First: The IRS knows that many supplies are fungible - utilized just as quickly for personal use as for business (primarily when used in a home office). Paper and toner can print homework and pictures as well as sales contracts. Binders and folders help with business organization, but the kids also need them for school. Take care not to deduct the personal use of supplies as a business expense. If an auditor finds the deduction unreasonable, you may have a difficult time proving otherwise.
- Second: As mentioned above, advance supply purchases must be reasonable. Buying twenty cases of copy paper on December 20th may make for a nice deduction, but (in addition to making little business-sense) will fail IRS scrutiny if your business only consumes two reams per month.
Take Away: Items that are regularly consumed by your business are supplies. Supplies include a wide variety of costs that include some promotion and office-related expenses. They are generally deductible in the year of purchase (if within reason). Supply costs add up quickly and are easy to overlook. Follow the tips highlighted above to ensure you get every deduction to which you are entitled.
Summary and Invite: We hope this article has helped you better understand the deductibility of Supplies on Schedule C. If you’d like to learn more about cutting your highest cost: TAXES, check out our Real Estate Agent Tax-Cut Library. The Real Estate Agent Tax-Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.