Generally, the final tangibles regulations don’t change the rules for deducting materials and supplies.
The final tangibles regulations use existing court cases to decide on the exact definition and treatment of materials and supplies but added some safe harbors to provide clarification. Unfortunately, clarification from the IRS can sometimes just further confuse everyone.
Materials and supplies are a huge part of the tangible property regulations and can create a significant tax-saving situation if the business uses many of these. Builders, manufacturers, and vehicle repair centers are examples of industries using materials and supplies in their business.
What is the definition of materials and supplies?
Materials and supplies are physical, non-inventory property used and consumed in a business’s operations. Here is the IRS definition(s) of materials and supplies:
- Purchased components acquired to maintain, repair, or improve physical property owned, leased, or serviced but not part of a larger purchased component.
- Consumables purchased like fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when they are first used in the operation of the business.
- Costs of physical (tangible) property with an economic useful life of 12 months or less, beginning when the property is used or consumed in your operations; or if the cost is $200 or less.
To be able to be expensed as a material or supply, the requirement, under the tangible property regulations, is that the expenditure must meet only one of the above criteria. Just one.
When can you deduct the costs of materials and supplies?
It depends.
Suppose the expenditure is for incidentals (materials and supplies purchased but no record of them), for example, palettes, pens, and paper. In that case, you deduct the materials and supplies costs in the purchase year.
If the expenditure is classified as non-incidental materials and supplies, then you deduct the materials and supplies costs in the year in which the materials and supplies are first used or consumed in your operations.
However, and this is important, a deductible material or supply cost could be subject to capitalization under the tangible property regulations if you use the material or supply to improve a unit of property or under the UNICAP rules if you use the material or supply to produce a product for resale.
Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.