Clarified rules for the treatment of materials and supplies costs
How do the final tangibles regulations governing deductions for materials and supplies differ from previous rules?
In most cases, the final tangibles regulations don't change the general rules for deducting materials and supplies. The final tangibles regulations merely incorporate pre-existing precedents on the definition and treatment of materials and supplies and add some safe harbors to provide you with additional certainty. The final tangibles regulations also provide additional elections and methods for those using rotable spare parts.
What is included in the definition of materials and supplies?
Materials and supplies are tangible, non-inventory property used and consumed in your operations including:
Acquired components – Costs of components acquired to maintain, repair, or improve tangible property owned, leased, or serviced by you and that's not acquired as part of a larger item of tangible property; or
Consumables – Costs of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in operations; or
12 month property – Costs of tangible property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in your operations; or
$200 property – Costs of tangible property that has an acquisition cost or production cost of $200 or less.
The property need only fit into one of the above categories to qualify as a material or supply.
When can you deduct the costs of materials and supplies?
As under prior rules, you may deduct the costs of incidental and non-incidental materials and supplies in the following manner:
Incidental materials and supplies – If the materials and supplies are incidental, i.e., of minor or secondary importance, carried on hand without keeping a record of consumption, and no beginning and ending inventories are recorded, e.g., pens, paper, staplers, toner, trash baskets, then you deduct the materials and supplies costs in the taxable year in which the amounts are paid or incurred, provided taxable income is clearly reflected.
Non-incidental materials and supplies – If the materials and supplies are not incidental, then you deduct the materials and supplies costs in the taxable year in which the materials and supplies are first used or consumed in your operations. For example, deduct certain expendable spare parts in a trucking business for which records of consumption are kept and inventories are recorded in the taxable year the part is removed from your storage area and installed in one of your trucks. However, an otherwise deductible material or supply cost could be subject to capitalization under § 263(a) if you use the material or supply to improve property or under § 263A if you incorporate the material or supply into property you produce or acquire for resale.
Application with de minimis safe harbor – If you elect to use the de minimis safe harbor and any materials and supplies also qualify for the safe harbor, you must deduct amounts paid for these materials or supplies under the safe harbor in the taxable year the amounts are paid or incurred. Such amounts are not treated as amounts paid for materials and supplies and may be deducted as business expenses in the taxable year they are paid or incurred.
What must you do to apply the final tangibles regulations to materials and supplies?
Because the final tangibles regulations governing the treatment of materials and supplies are based primarily on prior law, if you were previously in compliance with the rules you generally will still be in compliance and generally no action will be required to continue to apply these rules on a prospective basis.
Also, the final tangibles regulations governing the treatment of material and supplies apply to amounts paid or incurred in taxable years beginning on or after 1-1-2014. Therefore, for your first taxable year beginning 1-1-2014, most of you will not have a change in accounting method for your materials and supplies. If you desire to change your method of accounting for materials and supplies in a subsequent taxable year, you would file Form 3115 and compute a section 481(a) adjustment taking into account only amounts paid after 1-1-2014.
For more information, including simplified procedures for accounting method changes for certain small business taxpayers, see When and how do you change a method of accounting to use the final tangibles regulations?
Source:
https://www.irs.gov/businesses/small-bu ... egulations