It's important to know the difference between supplies and office expenses because these costs are handled differently on your business tax return and they affect your business taxes differently.
What are Office Supplies?
Office Supplies are the 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
- Beverages for the employee break room
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).
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
- Desktop computers, laptops, iPads, and tablets
- Office phones and office phone systems
- Cell phone expenses for employees
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 isn't deductible, but long-distance calls for business use may be. See this article about 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 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 a 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 printers 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% of the time for business purposes.
Office Supplies and Expenses - What you May Deduct
You may deduct 100% of the cost of office supplies and materials you keep on hand and 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. To deduct office supplies on your business tax return, you must meet all of these IRS rules:
- You don't keep a record of when they are used.
- You don't take inventory of these items.
- Deducting these items doesn't distort your income (in other words, you aren't taking so many deductions that your income is much less than it would be otherwise).
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.
Deducting vs. Depreciating Office Expenses
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. Each year you deduct that year's part of the cost.
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 business assets (including office assets) that cost $2,500 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.
To take the cost of this item as a deduction, you must also treat the item as an expense on your accounting system.
If any office supplies, expenses, or equipment cost over $2,500, these become depreciable assets, and you must depreciate these assets (spread the cost out over time).
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 or depreciate.
Supplies in Other Business Categories
Office Supplies in Cost of Goods Sold
Supplies you use in a warehouse or for shipping products are different from supplies used in your office. The supplies and materials you use to produce products are included in 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 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 that you use to ship products, like packaging materials, shipping tape, and labels
Office Supplies and 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 a separate record of these costs. Startup costs usually must be depreciated, but you can take up to $5,000 of startup 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 LLCs, show 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 out and include them with "Other Expenses" on 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.