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Materials and supplies – IRS guidance on how to deduct

materials and supplies, IRS, tax One of the areas included in the new Tangible Property and Repair Regulations released in 2013 and 2014 is guidance from the IRS regarding what are materials and supplies and when a business can deduct them.

The new regulations, which apply to tax years beginning in 2014, include:

  • New definitions of materials and supplies
  • Rules regarding when materials and supplies can be deducted

The regulations define materials and supplies as tangible items that are used or consumed in the taxpayer’s operations, not considered inventory and that:

  • Are components acquired to maintain, repair or improve another
  • Consists of fuel, lubricants and similar items that will be consumed in 12 months or less
  • Is a unit of property that has a useful life of less than 12 months
  • Is a unit of property that costs $200 or less
  • Identified in guidance from the Treasury as materials in supplies

The regulations also provide for the following accounting methods and accounting treatment for materials and supplies (other than rotable and temporary spare parts):

  • Incidental materials and supplies
    • Materials and supplies that are carried on hand and not tracked
    • Deductible in the taxable year in which paid.
  • Non-incidental materials and supplies
    • Generally must be inventoried
    • Deductible when used or consumed in operations.
  • Deduct under the de minimis safe harbor election if appropriate.

The new regulations don’t define “incidental” or “non-incidental,” so you will have to rely on prior guidance provided by the IRS.

The regulations also include guidance for additional rules for rotable and temporary spare parts not covered here. See our blog “Expense Your Property under the De Minimis Safe Harbor” for additional information about the de minimis safe harbor election.

Melinda Nelson, CPA + Michael Willett