“Knowing the difference between equipment and supplies can help you get the correct tax deductions. ”
Equipment vs. Supplies: What Are The Differences?
When referring to business supplies, this will include items you use in the short term to make your business run. Office supplies, for example, include pens, paper, envelopes, staplers, and all of the other things needed to keep a standard business office running. Or it can include janitorial supplies like rags, cleaning materials, and other maintenance tools.
Business equipment, on the other hand, includes long-term assets like heavy work equipment, technology like desktops and computers, and anything you’ll use for more than a few years. A few more examples of business equipment include company vehicles, medical equipment, and office furniture.
The main differences between equipment and supplies are cost and how long the item will last. Supplies are quickly used and are more affordable everyday necessities. Equipment is long-term, often expensive, and even has potential resale value.
How to Differentiate Between Equipment and Supplies?
Differentiating between equipment and supplies is fairly straightforward. Ask yourself the following questions and you should be able to tell how the item in question should be classified.
● How long will you use the item? Supplies you’ll use for under a year before they need replenishing while equipment is meant for long-term use.
● How much are you paying for it? Supplies are less expensive and can be purchased by even the smallest of businesses. Equipment can be costly and often requires leasing or financing.
● Does it help create the final product or is it the final project? Some supplies will become the product you’re creating or at least aid in the creation, while equipment is used to assemble or perform the service you offer.
● Can it be resold? Most equipment will hold resale value after any financing has been paid off. Supplies don’t hold this same value, as they’re often cleaning products and office supplies rather than expensive equipment.
Why The Correct Classification is so Important
If you’re thinking at this point that it seems a bit petty to differentiate between equipment and supplies, there’s a simple reason that’s not the case: taxes. Supplies and equipment are both subject to tax deductions, but the way they are deducted is different.
For any items you buy directly related to your business that cost $200 or less, the IRS classifies them as materials or supplies. You can deduct these expenses as long as you meet the following requirements, as stated by the IRS:
● You don’t keep a record of when they [the supplies] are used.
● You don’t take an inventory of the amount on hand at the beginning and end of the tax year.
● This method doesn’t distort your income.
Equipment works a little differently. It’s viewed by the IRS as a long-term asset, which still qualifies for a deduction, but the cost to purchase the equipment is depreciated. In simple terms, that means you won’t get the full deduction in year one, but you’ll need to take it in increments over the equipment’s life.
Additionally, if you ever decide to sell your equipment, there are also tax implications. You’ll be required to pay capital gains tax. The rate you’ll pay will depend on how long you’ve owned the equipment. If you’ve only owned it for a year or less, you’ll be charged the regular income tax rate. For equipment you’ve had for over a year, you’ll face the long-term capital gains rate which typically only goes up to 20%.