Businesses have forever struggled with the issue of when to deduct amounts paid for the acquisition, production, or improvements of tangible personal property used in their operations. The myriad of conflicting rules contained in the IRS Codes, Regulations and Revenue Procedures, has always made it difficult for businesses to determine when to “expense or capitalize” a purchased or constructed property item.

The IRS’s latest attempt to provide guidance to the “expense vs. capitalization” issue was recently addressed in a set of new repair and maintenance regulations, which are effective January 1, 2014.

This is the first in a number of articles we will publish to discuss these regulations. This article summarizes the new rules for deducting Materials and Supplies.

New Definition
First, your business needs to determine if a purchased item is a material and supply.

Materials & supplies are tangible property used in your business operations that is not inventory and falls within any of the following categories:
• A component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by you and that is not acquired as part of any single unit of tangible property;
• Fuel, lubricants, water, and similar items, that are reasonably expected to be consumed in 12 months or less, beginning when used in your operations;
• Unit of property with an economic useful life of 12 months or less, beginning when the property is used or consumed in your operations;
• Unit of property that has an acquisition cost or production cost of $200 or less; or
• Identified in published guidance in the Federal Register or in the Internal Revenue Bulletin as materials and supplies for which treatment is permitted under this section.

Category
Second, materials & supplies need to be categorized by your business as follows:
• Incidental materials and supplies. Materials and supplies that are carried on hand and for which no record of consumption is kept or of which physical inventories at the beginning and end of the taxable year are not taken.
• Non-incidental materials and supplies. All other materials and supplies.

Timing of Deduction
Third, materials & supplies are deducted on your tax return as follows:
• Incidental materials and supplies. Deducted in the year you purchased.
• Non-incidental materials and supplies. Deducted in the year used or consumed in your operations.

For additional information regarding these rules, please contact The Whitlock Company.

Written by Kevin P. Hogan, CPA, CMA