The IRS strikes again! In September 2013 the IRS came out with new regulations on materials & supplies, repairs and maintenance and capital expenditures. All three areas seem like common sense to me, that is until the IRS got a hold of them. They took 4 pages of regulations and turned it into well over 100!
It is a huge issue and a large topic to cover in one blog, so I’m going to try and break it down into several. Let’s start with materials and supplies. There are 3 types of materials and supplies, incidental, non-incidental and rotable and temporary parts. I’ll give you an example of each.
Incidental: I purchase two packs of pens, and expect to use them over two years. The cost is minimal and I don’t keep inventory of each pen. These are incidental compared to my business and can be deductible when paid.
Non-incidental: I purchase 10 calculators. The cost is minimal but I keep an inventory of each calculator and when it is placed in service. They would be non-incidental and are deductible when placed in service. (Notice they are not deductible when I buy them only when I place them in service)
Rotable or temporary: I have a vehicle which I only use for business and I purchase a small spare tire, which I store in the trunk of my car (and pray I never have to use). This is a temporary part and cannot be deducted until I dispose of it.
Now let’s discuss the definition of materials and supplies.
- Acquired to maintain, repair or improve a unit of property
- Has a cost of $200 or less
- Has an economic useful life of 12 months or less
Let’s look at an example of the economic useful life and how complicated it can get.
A business owner purchases a mold to create widgets. The mold is only good for 12 months or less and each mold costs $6,000. The mold is considered a supply since it lasts for less than 12 months despite it costing more than $200.
Now let’s apply it to your business.
1. Every time you purchase a material or supply think about its cost. Was it less than $200. If it was then expense it.
2. If the material or supply you purchased was more than $200 think about its useful life. If it will be consumed within a year, then expense it.
3. If the material or supply you purchased was more than $200 and will last longer than a year, you will need to capitalize it. Unless you have a policy on hand that states differently.
The policy that you must have on hand in order to expense materials and supplies must be dated by 12/31/13 to be in place for the 2014 tax year and the maximum you can expense with the policy in place is $500 unless your company is large enough that it has audited annual financial statements. I have a sample policy available for use by all my clients. If you would like one for your file please contact me.