Business Equipment vs. Supplies for Tax Deductions
Business equipment and business supplies are often confused when a business owner is completing a business tax form. We'll look at the two types of purchases and how they are considered for both accounting and tax purposes.
Equipment and Supplies - Business Use, Not Personal
First, note that these purchases are for business purposes only, not for personal use. If you buy business equipment, like a computer, it must be used entirely for your business in order for you to deduct the full cost as a business expense. The same is true for supplies. Supplies, like printer paper, cannot be used for personal printing. 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 portion of the cost of business equipment if you can prove the amount of business use.
Business and equipment and business supplies should be purchased with your business credit card or bank account. But the purchase alone doesn't prove their use as a business expense.
The most important thing to remember about the difference between business supplies and business equipment is that supplies are a current asset, while equipment is a long-term asset. Current assets are those assets used up within a year (more or less), while long-term assets are used over several years. Yes, I know copy paper can sit on a shelf for over a year, but this is just a general guideline for categorizing assets for tax purposes.
Since supplies are supposedly used up within the year of purchase, the cost of supplies as current assets is expensed (taken as a deduction) the year they are purchased. Since equipment can be used over a longer period of time, the cost of this equipment is and the cost of business equipment is depreciated (taken as a deduction over the useful life of the equipment).
In each case, the purchase cost is a deductible business expense (as long as the item purchased is used for business purposes), it's just that the expense may be taken over a shorter or longer period of time.
What Are Business Supplies?
Business supplies are those items purchased which are typically used up during the year. The most common types of business supplies are office supplies, including supplies used to run copiers, printers, and other office machines.
If you are buying supplies for use in products you manufacture or sell, including packaging and shipping supplies, these supplies are handled differently for accounting and tax purposes.
Supplies for making, shipping, and packaging products are considered part of the cost of the goods sold and are part of the Cost of Goods Sold calculation. At the end of a year, an inventory is taken of these supplies, as part of this calculation.
For accounting purposes, business supplies are considered as current assets. Business supplies purchases are deducted on your business tax return in the "Expenses" or "Deductions" section.
What is Business Equipment?
Business equipment is tangible property used in a business. Equipment is considered as more permanent, longer lasting than supplies, which are used up quickly. The term equipment includes machinery, furniture, and fixtures, vehicles, computers, electronic devices, office machines, Equipment does not include land or buildings owned by a business.
New IRS Guidelines for Expensing Business Equipment
Effective in 2016, the IRS allows businesses to take a deduction in the current year for the entire price of a business asset under $2,500 (per invoice). Read more about the details in this article about current changes to tax laws and limits.
More About Capital Assets
From an accounting standpoint, equipment is considered capital assets or fixed assets, used by the business to make a profit. Purchase of equipment is not accounted for as an expense in one year, but the expense is spread out over the life of the equipment; that is, it is depreciated.
Gains or losses on the sales of capital assets, including equipment, are handled differently, from both tax and accounting perspectives, from regular income of a business from sales. Capital gains are taxed differently from sales income.
Learn more about business equipment and other business assets, including how sales of assets are taxed, capital gains, keeping records of business assets, and how business assets are valued.