Office Supplies and Office Expenses on Your Business Taxes
What's the Difference Between Office Supplies and Office Expenses?
It's important to know the difference between supplies and office expenses because these costs are handled differently on your business tax return.
What are Office Supplies?
Office Supplies are the tangible, traditional office items, like pens, staplers, paper clips, USB thumb drives, and printer ink cartridges that get used up by employees. Also included in office supplies are:
- Record keeping supplies, like invoices and sales receipts
- Janitorial and cleaning supplies,
- Bathroom tissue
- Places to keep supplies, like fixing cabinets and storage lockers
- Paper plates, paper towels, and plastic utensils
- Low-cost office furniture (a used desk, for example) that costs less than $2500.
The IRS also includes postage in office supplies, but large amounts of postage for shipping products are classified differently (in cost of goods sold, as described below).
Most shipping supplies are not considered as part of office supplies. Any supplies and postage for shipping products you sell should be tracked as part of cost of goods sold. The calculation for cost of goods sold is separate from the list of business expenses.
What are Office Expenses?
Office Expenses are the other expenses of running an office. These expenses are used for the operations of the office, so they are often called "office operating expenses."
Office operating expenses include:
- Web site services, cloud services (like Dropbox or iCloud)
- Internet hosting fees and website maintenance, domain names, monthly costs for apps (like Dropbox).
- Software, including web based software like QuickBooks products,
- Merchant account fees (banking for selling
- Desktop computers, laptops, iPads, and tablets
- Smartphones , and most software and hardware. You might also put cell phone expenses in office expenses (or in utilities).
Personal Use of Office Supplies and Expenses
To deduct office supplies 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 you can't deduct them. For example, if you use the office copier and binder to produce a school report for your child, that's personal use, and those costs should be kept out of your business tax filing.
Some office equipment may be listed property. This is property that can be used for both business and personal purposes. For example, if you own video recorder bought by your business and you use it for both business and personal videos, you will need to keep good records to separate out the business and personal use and you can only deduct the business usage.
Cell phones, computers, and peripheral equipment are no longer listed property, but you still should keep records separating business and personal use and be able to show that you used these items more than 50 percent of the time for business purposes.
Office Supplies and Expenses - What you May Deduct
You may deduct 100 percent of the cost of office supplies and materials you have used during the year. You may also deduct the cost of stamps and postage charges and postage used in postage meters during the year.
Deducting vs. Depreciating Office Expenses - New IRS Rules
It used to be that all business assets (items used for more than a year) that cost more than $500 had to be depreciated. Depreciation is a way of spreading out the cost of a business asset over the life of that item. The cost for each year can be deducted
The IRS has a new simpler method for taking smaller cost assets as expenses instead of depreciating them. Effective in 2016 and beyond, you can deduct as an expense business assets (including office assets) that cost $2500 or less. This includes software and software suites, laptops, tablets, smartphones, and other smaller electronics. The cost you can expense includes the cost to buy and set up the item.
Let's say you need Adobe Acrobat X Professional software for your work. The cost of this item is typically over $500. Previous to the new IRS rule, you would have had to depreciate the cost. Now, because the maximum for expensing is $2500, you can take the item as a business expense in the year you buy it and start using it.
If any office supplies, expenses, or equipment cost over $2500, these become depreciable assets, and you must depreciate these assets.
Keeping Records to Prove Deductions
You don't have to turn your business records over to the IRS along with your business tax return every year, but you must have good records to prove the office supplies and office operating expenses you take as deductions.
Talk to your tax preparer about the records you need to keep and get help with calculating depreciation on more expensive office expenses since each asset has a different useful life.
Supplies and Materials Used to Produce or Ship Products
Supplies you use in a warehouse or for shipping products are different from supplies used in your office. Be careful to distinguish between office supplies and equipment used generally in your business to operate your office vs. supplies and materials used to produce products.
The supplies and materials you use to produce products are included in cost of goods sold. In the same way, you can't deduct postage and shipping for products sold; these are considered part of your cost of goods sold.
Cost of goods sold is a calculation on your business tax return that looks at your inventory changes during the year and everything that you spend to produce and ship products to your customers.
Office Supplies and Office Equipment in Startup Costs
If you are stocking up on office supplies and buying office equipment, computers, and software as part of your business startup, you will need to keep these costs separate. You may be required to spread out these startup costs over several years. Keep a list of the costs and discuss them with your tax preparer.
Other Restrictions on Deducting Office Supplies and Office Equipment
You may 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 could use it all during the year. Check with your tax professional on how to determine an amount for this expense.
Office Supplies and Office Expenses on Your Business Tax Return
For sole proprietors and single-member LLCs, show office supplies in the "office supplies" category of Schedule C, on Line 22. You can include office expenses (including those expensed under the new rule) in this category or you can separate office expenses out and include them with "Other Expenses" on Line 27a. For "Other Expenses," you must list the different categories on Part V of your Schedule C, bringing the total to Line 27a.
For partnerships and multiple-member LLCs, show these expenses in the "Other Deductions" section of Form 1065 (line 20). You must attach a separate statement breaking down the different deductions included in this line item.
For corporations, show these expenses in the "Other Deductions" section of Form 1120. First, you must include a statement listing the deductions, then include the total on "Other Deductions," Line 26.
Bottom Line Easy:
If you want to keep things simple on your tax return, put all office supplies and office expenses together as office supplies. Then separate out the more expensive items over $2500 and talk to your tax preparer about depreciating these items.