What expense category is Tools and Small Equipment?

For any hands-on business, from construction and auto repair to landscaping and catering, having the right tools and small equipment is essential for daily operations. While major machinery purchases are long-term assets that must be depreciated, the IRS has specific rules that allow you to deduct the cost of smaller tools and equipment in the year you buy them.

Understanding these rules, particularly the de minimis safe harbor election, is critical for accountants and business owners to maximize current-year deductions and simplify asset management. This guide explains when you can expense these items and how to categorize them for tax compliance purposes.

Tools and Small Equipment (Expensed) Category

When tools and small equipment meet the criteria for being a current expense, they are not a specific line item on the tax return. They are generally categorized under one of two expense types:

1. Supplies: If the tools are low-cost and have a short useful life, they can be treated like other deductible supplies.
2. Other Expenses: This category encompasses various business costs that do not fit into a dedicated line item.

Important Considerations When Classifying Tools and Equipment

The most critical factor is determining whether a tool can be expensed immediately or must be capitalized and depreciated over time. The IRS provides several rules that allow for the immediate expensing of certain expenses.

The Useful Life and $200 Rules

IRS Publication 535 outlines two long-standing rules for expensing tools:

• You can deduct the cost of tools if they have a useful life of one year or less.
• You can also deduct the cost of tools if they cost $200 or less per item or invoice.

The De Minimis Safe Harbor Election

This is the most powerful rule for expensing equipment. Publication 535 explains that you can elect to use a de minimis safe harbor to deduct the cost of tangible property that would otherwise have to be capitalized.

• If you do not have an applicable financial statement (which applies to most small businesses), you can use this safe harbor to deduct items costing up to $2,500 per item or per invoice.
• If you do have an applicable financial statement, the limit increases to $5,000 per item or per invoice.

To use this safe harbor, you must treat the expenditure as an expense on your books and records for the year as well. This election allows you to immediately deduct the cost of many small pieces of equipment, rather than depreciating them over several years.

Distinction from Capitalized Equipment

Any tool or piece of equipment that does not meet one of the exceptions listed above must be treated as a capital asset. The cost must be capitalized and recovered over time through depreciation, as detailed in IRS Publication 946.

Tax Implications and Recordkeeping

To deduct the cost of tools and small equipment, you must report the expense correctly and maintain proper documentation.

How to Report the Deduction

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

• If treated as supplies, the cost is reported on Line 22, Supplies.
• If treated as a general expense under the de minimis safe harbor, it is reported under Part II, Line 27a, Other expenses.

What Records to Keep

It is essential to have documentary evidence to substantiate your expenses, especially if you are using a safe harbor rule. Your records must include:

• Invoices that clearly show the cost per item. This is critical for proving that an item falls under the $2,500 or $5,000 de minimis limit.
• Receipts and proof of payment for all tool and equipment purchases.
• A written statement is attached to your tax return if you are making the formal de minimis safe harbor election.

How Fyle Can Automate Tracking for Tools and Small Equipment

Fyle helps you capture and document every purchase of tools and small equipment, ensuring you have the detailed records needed to apply IRS expensing rules correctly.

• Capture Per-Item Costs: Instantly capture detailed receipts from hardware or supply stores using the Fyle mobile app.
• Enforce Capitalization Policies: Fyle’s policy engine can flag any single-item purchase that exceeds your company's de minimis threshold for review and approval.
• Track by Job Site or Employee: Code tool purchases to a specific project or employee for better cost control and tracking.
• Automate Your Accounting: Sync expenses to the correct GL account in QuickBooks or Xero—either Supplies for expensed items or a Fixed Asset account.