- As far as the IRS is concerned, office supplies are the tangible items you use and regularly replenish to conduct business in your office, including pens, paper, and printer toner. Office expenses, on the other hand, are items and services you use for your business that don’t fall into more specific deduction categories. They include cleaning services, general office maintenance, and some electronics and computer hardware.
Keep reading to learn why it pays for small business owners to understand deductions (even if you have an accountant) and check out our foolproof guide to understand the difference between office supplies and office expenses.
Save time and money at tax time
Small business owners must keep records for all deductible expenses. It may be tempting to lump your receipts together in a single folder or digital file. However, when possible it’s better to separate them into deduction categories that are typical for your industry. It will save you time and stress when you do your taxes, and it may even help save you money. Accountants don’t enjoy wading through disorderly boxes of receipts, and no one wants to pay expensive accounting fees for someone to sort receipts.
Common business deduction categories include:
- Car and truck expenses
- Building repairs
- Capital assets (big-ticket items, such as buildings or equipment, that are usually deducted in small increments over several years)
- Legal and professional fees
- Meals and entertainment
- Office supplies
- Office expenses
Most categories are fairly self-explanatory, but the difference between office supplies and office expenses can be confusing.
Office supplies vs. office expenses
How do you know whether an expense should be considered an office supply or an office expense? Here’s a cheat sheet.
The IRS defines office supplies as ordinary and necessary tangible items you need to run your business. By ordinary and necessary, they mean purchases that are common and accepted in your industry, and helpful and appropriate to your business. Office supplies are considered current assets, which means they need to be replenished often, usually (but not always) within a business year. You can only deduct the cost of supplies you use in the current year, so don’t stock up near the end of the year.
Here’s a list of office supplies many businesses routinely purchase.
- Writing utensils
- Business cards
- Hand soap
- Sticky notes
- Mailing supplies
- Rubber bands
- Binder clips
- Paper plates
- Paper towels
- Plastic utensils
- Bathroom tissue
- Cleaning supplies
- Furniture (small items)
There’s one catch. Depending on how you use some of these supplies, they may not be deductible as office supplies. If you use supplies to make or ship a product, they’re calculated into costs of goods sold on your tax return and can’t be deducted as office supplies.
For instance, if you purchase paper and mailing supplies to make paper planners that you sell, you’d calculate these purchases into costs of gifts sold instead of deducting them as office supplies. However, if you purchase paper and mailing supplies to communicate with customers or vendors, you’d deduct them as office supplies. In short, office supplies are items you use to run your business, not to make products.
Office expenses must also be ordinary and necessary, according to the IRS. They include non-tangible services and some hardware you need to run your company. But they don’t include purchases that have their own deduction categories, such as utilities or rent. Common office expenses include:
- Cloud services
- Website maintenance
- Web-hosting fees
- Domain names
- Merchant account fees
- Office cleaning services
- General office maintenance
- Desktop computers
If you use office expenses for both personal and business use, they’re considered listed property. To deduct them, you need to use them more than 50 percent of the time for business and only deduct the portion you use for business. For example, if you use Adobe Photoshop 75 percent of the time for business and the rest for personal use, you could deduct 75 percent of the monthly cost of the product as an office expense. But be ready to provide supportive evidence showing how much you use it for business if you’re audited.
There are limits to how much companies can expense in a single year. Bigger ticket purchases may need to be treated as capital assets and depreciated over several years. Talk to your accountant about your specific situation.
By understanding the basics of business deduction categories, including the difference between office supplies and office expenses, business owners will stay organized and avoid missing out on important deductions. However, deductions are complicated, and it’s always a good idea to talk to a tax professional for advice.