Small businesses are allowed to deduct 100% of their office supplies on business taxes each year. However, it is important to understand the differences between office supplies, office equipment, and office expenses, as well as the requirements surrounding these deductions. You should keep records of both and make sure that you have your receipts on hand.
Business Use Versus Personal Use
It is important to understand that you can only write off purchases that are used for your business. In other words, if you are using your business printer to print out school projects for your kids, you cannot write that off as a business expense.
You can use business equipment such as a computer for personal purposes, but you will need to deduct only the percentage of the cost that is applied to your business. If you are audited, you will need to prove that the percentage is accurate.
What Is the Difference Between Expensing and Depreciation?
When you file your taxes, you can expense short-term assets, which are those that are designed to be used within one year. If you make long-term asset purchases, such as a printer or a computer, you have to depreciate them on your returns.
As long as you are including items that were used for your business, you can deduct the purchase cost in one of these ways. When you depreciate items, you are simply spreading out the deduction over the useful life of the item.
What Are Office Supplies?
Office supplies, or business supplies, are products that you purchase for your business that are intended to be used up over the course of the year. This includes the following:
- Sticky notes
- Printer ink
This list is by no means exhaustive. In addition, you should keep in mind that the supplies you use to ship and package your products are not office supplies. These are considered inventory for the Cost of Goods Sold calculation on your income tax returns. Your office supplies will go in the Expenses or Deductions section of the return.
What Is Office Equipment?
Office equipment or business equipment is an asset that is used for your office for longer than a year. Office equipment that might qualify as deductible expenses include:
- Other electronic devices
These expenses are generally depreciated over the life of the item. For accounting purposes, office equipment is considered a capital asset that is used to make profits. If you sell any of these items, the proceeds are handled as capital gains or losses.
However, you have another option as well. Section 179 is a provision that allows you to deduct the cost of qualified equipment from your business’s gross income. In addition, this equipment can now be new or used, as opposed to only being applied to new equipment.
The following are considered to be qualified assets:
- Business machines or equipment
- Office furniture
- SUVs, pickups, or vans that weight over 6,000 pounds
- Interior commercial property improvements
If you take any of these deductions, you must make sure that you are not using the items for personal use. For example, you cannot buy new office furniture and then transfer it to your home.
In addition, if you purchase software that is crucial to income-producing activities, you can deduct it under Section 179.
What Are Office Expenses?
Office expenses are the costs of operating your business. This may include the following:
- Mortgage interest
- Website services and cloud services
- Internet hosting services
- Improvements such as paint or carpet
If you operate a home office, you need to make sure that you only deduct the business expenses specifically used for your business. The IRS has a formula for determining the portion based on the square footage of your home office. This percentage will be applied to these expenses, and you can deduct it as an office expense.
Business Use of Your Car
If you have a car that is used for both business and personal use, you can divide its use and deduct the business use portion. Small business owners need to keep their receipts and divide the expenses based on the actual mileage. It is important to keep accurate records of your usage in case you are audited.
You should keep a notebook in your car and keep a record of dates, mileage, toll costs, parking costs, and what each trip is for. You can multiply the miles you drove for business by 54.5 cents and add your tolls and parking costs to arrive at the total of your deduction.
Another choice is to take these total costs for both business and personal use, add in the cost of gas, repairs, and insurance, and multiply it by the percentage of time you use the car for business. For example, if you spent $20,000 and you used the car for business 50% of the time, you would deduct $10,000.
When you lease a car, you can include the lease payments in your calculations. If you have car payments, you can include the interest on your loan and the depreciation of the car.
When you are determining your mileage, how you calculate it will depend on whether you have a home office or a separate place of business. If your home is a home office, your mileage starts as soon as you leave your house. If you have to go to work first, you cannot deduct the mileage of driving to work. You must wait until you leave the office for the first business activity.
Cost of Goods Sold
Businesses that manufacture products or buy products to sell will assign a value to their inventory at the beginning and end of each year. The following expenses should be considered:
- Labor for production of goods
- Factory overhead
- Shipping costs
- Distribution costs
- Salesforce costs
It is important to make sure that you have records and keep these expenses separate from other types of business costs.
Home Office Taxes
If you use your home for your business, you can deduct some expenses. However, it is important to follow IRS guidelines. To qualify, you must use part of your home in the following way:
- Exclusively and regularly used as your principal place of business
- Exclusively and regularly as a place to meet and deal with patients, clients, and customers
- Storage on a regular basis
- Rental use
- Daycare facility
The portion of your home that you use exclusively for business needs to be identifiable as a separate space, although it does not need to be a separate room. You cannot use the space for personal purposes at all if you want to qualify.
In addition, you cannot claim your home office if you have another office where you conduct most of your business. Working from home when you have a separate physical place of business does not qualify.
Are Promotional Products Office Supplies?
Promotional products such as pens with your company name on them are not office supplies. Promotional items are considered advertising expenses, and they cannot be included in your list of office supplies. Even if you keep the pens and use them in your office, they are still promotional items for advertising.
This will hold true for any promotional items that you purchase. There are many different customizable promotional products that people buy, including pens, notepads, key chains, and more, and all of these items are advertising expenses, even if you keep them in your office and use them.
How Are Office Supplies Deducted?
You are entitled to a deduction for 100% of your office supplies. This means that if you spend $5,000 on office supplies and your profits are $25,000, you can deduct $5,000 and your net profit will decrease to $20,000.
What Travel, Entertainment, and Meal Expenses Are Deductible?
Some of the former entertainment deductions have been eliminated. You can no longer deduct expenses for entertaining clients before or after a business meeting. However, you can deduct 50% of business meals, which includes food and drinks. You can also deduct hotel fees and company cars.
Health Insurance Premiums
If you are self-employed and pay your own insurance premiums, you can usually deduct them. However, the deduction cannot be more than your net profit for your business. You should also keep in mind that you cannot deduct this premium if you were eligible for other insurance and declined it. For example, if your spouse works and has a healthcare plan available, but you choose your own plan, you cannot deduct the premium.
Retirement Contributions and Social Security Payments
If you are self-employed and contribute to a 401(k), SEP IRA, or Keogh, you can deduct your contribution on your tax return.
When you are self-employed, you have to pay twice as much in social security contributions because you are both the employer and the employee. You can deduct half of it on your 1040, though.
Business Phone Use
If you have one phone line and use it for business at home, you cannot deduct it. However, if you add a second line that is designated for business calls, all of the charges are deductible. If you have a cell phone and use it for business, you can keep a record of the amount of time you use it for business versus personal use. You can deduct that percentage of your phone bill on your tax returns.
Employees Under 21
If you are a sole proprietor or operate as a partnership, you can hire people under the age of 21 to receive tax breaks. Children who are 17 and younger pay no Social Security or Medicare taxes, and there is no unemployment tax for children under the age of 21.
Final Words on Office Supplies Taxes
Tax laws are complicated and they are updated regularly. It is important to stay on top of what you can and cannot deduct each year. If you own a small business and operate out of your home, there are tax deductions that you can and should take advantage of.
You should remember that you have to designate an area of your home exclusively for business purposes, determine the square footage, and then calculate what percentage of your mortgage interest, insurance, utilities, and other expenses that it uses. If you have a landline, make sure that you add a second phone exclusively for your business. Otherwise, deduct the percentage of your cell phone bill that matches what you use for business.
You can deduct your office equipment and expenses as well. Just be sure to keep accurate records so that you can prove that your deductions are legitimate. It is important that you only deduct equipment that is used exclusively for your business. Don’t buy furniture or other equipment and transfer it to your home for personal use.
You can deduct 100% of your office supplies. This includes items that you are expected to use within the year. However, do not go on a spending spree in December as the IRS will recognize that you could not use the supplies by the end of the year. This deduction is for the supplies you use during the current tax year, so the best time to purchase supplies is at the beginning of each quarter.
You may include items such as pens, pencils, staplers, and notebooks, but you must use them exclusively for your office. Do not include promotional items, even if they double as office supplies, as the IRS considers them to be advertising expenses.
You can deduct the cost of printers, computers, tablets, and other devices as long as the cost is under $2,500. If the device costs more than that, you must take a depreciation approach. Your shipping supplies are not office supplies, but they are included in the section for Cost of Goods Sold. This is a separate section on your tax return, so make sure that you separate this expense.
There are plenty of deductions to help you keep more of your hard-earned money, so be sure to keep accurate records so that filing your returns will be easier.