How to Understand Tax Rules for Deducting Business Supplies

Most small business owners spend a fair amount of money on business supplies. Many easily missed expenses fall under the category of business supplies that qualify as deductions to reduce your tax bill. Follow these steps to understand what these items are and the tax rules for deducting them.

Instructions

Difficulty: Easy

Things You’ll Need:

• Documentation and receipts

1. Understand first that the tax rules define business supplies as an expense "ordinary, necessary and reasonable" used during "trade or business" to create revenue. You can deduct these expenses in the same tax year you use them.
2. Realize that deducting business supplies isn't just about adding up money spent on paper and pencils. Business supplies can also include computer software, credit bureau fees, postage, coffee supplies, business cards, petty cash funds, telephone book listings, advertising and other items.
3. Know the difference between business supplies and capital assets. Certain equipment, for instance, has a life span of more than a year, and according to tax rules it must be depreciated over two or more years.
4. Be aware that you can deduct business supplies left on hand the same year that you purchased them.
5. Enlist the support and expert guidance of a Certified Public Accountant, either at the end of the tax year to handle the preparation and filing of your taxes or during the course of the year to manage your record keeping.

Tips & Warnings

• Keep organized records. Retain all receipts and canceled checks for business supplies to substantiate your claim for deducting these expenses from your tax liability.
• Play by the rules to avoid a tax audit of your business, which could also lead to a review of your personal tax records. While many business owners think they can safely claim deductions without a receipt, don't believe it. The IRS expects a clear and accurate paper trail. Otherwise, they may decide your deductions are invalid and that you made false claims on your tax return, both of which could result in stiff penalties.