What expense category is Small Tools and Consumable Supplies?

For businesses in construction, manufacturing, or skilled trades, the cost of small tools and consumable supplies—like saw blades, drill bits, sandpaper, and safety gloves—is a constant and significant expense. Unlike general office supplies, these items are often used up on a specific job.

The IRS has specific rules for these costs. Instead of being treated as general overhead, they are often considered direct costs of a project and are accounted for within the Cost of Goods Sold (COGS). This guide will clarify how to categorize job-specific tools and supplies to ensure accurate and compliant financial reporting.

Small Tools and Consumable Supplies (Job-Specific) Category

The tax category for job-specific tools and supplies depends on how they are used in your business.

1. Cost of Goods Sold (COGS): If you are a manufacturer or producer (such as a construction company), the cost of materials and supplies that are consumed in the production process is included in your Cost of Goods Sold. This applies to items that are directly tied to a specific job.
2. Supplies: If the items are considered indirect costs and are not part of the final product, IRS Publication 334 states they are deducted as Supplies.

Important Considerations While Classifying Small Tools and Consumable Supplies (Job-Specific)

The most critical factor is distinguishing between direct costs that are part of a job and general overhead supplies.

Direct vs. Indirect Costs

• Direct Costs (Include in COGS): These are the costs of supplies that are directly consumed in the production of a specific project. For example, the cost of sandpaper, welding rods, or paint used on a particular job.
• Indirect Costs (Deduct as Supplies): These are general supplies used in your business that are not attributable to a specific project, such as cleaning supplies for your workshop.

The Uniform Capitalization Rules (UNICAP)

As a business that produces property, you may be subject to the uniform capitalization rules detailed in IRS Publication 535. This means you must include in your COGS not only the direct costs of materials and supplies for a job but also a portion of your indirect costs. Small business taxpayers with average annual gross receipts below a certain threshold are generally exempt.

Rules for Expensing Small Tools

IRS Publication 535 provides several rules that allow you to deduct the cost of small tools in the current year rather than capitalizing them:

• If the tool has a useful life of one year or less.
• If the tool costs $200 or less.
• Under the de minimis safe harbor election, which allows you to expense items costing up to $2,500 per item or invoice (for businesses without an applicable financial statement).

Tax Implications and Recordkeeping

The reporting for these costs depends on their classification.

How to Report the Costs

For a sole proprietor filing a Schedule C (Form 1040):

• Direct Costs: Job-specific consumable supplies are included in the calculation of Cost of Goods Sold in Part III.
• Indirect Costs: General supplies and small tools are deducted on Part II, Line 22, Supplies.

What Records to Keep

You must have documentary evidence to substantiate all costs. Your records should include:

• Invoices and receipts from supply houses and vendors.
• Purchase orders that may link specific supplies to a job number.
• Proof of payment for all purchases.

How Fyle Can Automate Expense Tracking for Job-Specific Supplies

Fyle helps you capture and organize the high volume of supply and tool purchases for every job, providing a clear record for your COGS and expense calculations.

• Capture Receipts on the Go: Your crew can instantly snap pictures of receipts from supply houses using the Fyle mobile app.
• Track by Job Site: Code every purchase of blades, bits, or other consumables to a specific project for precise cost allocation.
• Create a Clear Audit Trail: Fyle maintains a complete and unalterable record of all purchases, which is essential for accurate job costing.
• Automate Your Accounting: Sync categorized costs directly to your COGS or Supplies account in QuickBooks, Xero, NetSuite, or Sage Intacct.