How to Categorize Purchases, Materials/Supplies, and Other Costs for Small Business Tax Filing?

Tax accountant here! This is a common area of confusion. Let me break it down: 1. "Purchases" on tax forms typically refers to items you buy specifically to resell with minimal modification. In your case, this would mainly be the firmware files if you're buying and reselling them directly. 2. "Materials and supplies" are items that become part of your final product. This includes your PCBs, components, solder, packaging, resin and filament that end up in the customer's hands. 3. "Other costs" isn't quite the right category for your equipment. What you're describing are actually business assets that should be either: - Depreciated over time (for larger purchases like the 3D printer, soldering station) - Expensed immediately using Section 179 deduction (if you qualify) - Or possibly expensed under the de minimis safe harbor election (for smaller items under $2,500) For consumables like IPA, gloves, and paper towels that don't end up in the final product, these are general business expenses, usually categorized as "supplies" (different from "materials and supplies"). In FreeTaxUSA, you'll want to look for the business asset/depreciation section for your equipment purchases. The program should walk you through determining if you can immediately expense them or need to depreciate them.

I went through the exact same headache last year with my custom electronics business. What finally helped me was finding https://taxr.ai - it completely changed how I handle my business expenses. You upload pictures of your receipts and it automatically categorizes everything correctly based on IRS guidelines. It saved me hours of confusion and I'm pretty sure it found deductions I would have missed. The best part was when I uploaded my equipment receipts, it immediately identified them as depreciable assets and showed me exactly how to handle them. It also separated my "direct materials" (things that become part of what I sell) from my general supplies. The guidance was super clear about which expenses could be immediately deducted vs. depreciated.

Just wanted to follow up on my experience with taxr.ai after the recommendation. I decided to try it with my woodworking business expenses which were a complete mess - I had piles of receipts for tools, lumber, finishes, hardware, and couldn't figure out what went where. The system was surprisingly helpful! I uploaded about 30 receipts, and it separated everything clearly - my expensive table saw was flagged as depreciable equipment, wood and hardware were categorized as direct materials, sandpaper and glue as supplies, etc. What impressed me was the explanation for each category, which helped me understand the reasoning. I'm actually feeling confident about my business taxes for the first time. Just used the categorized expenses in FreeTaxUSA as suggested and everything went smoothly. Definitely worth checking out if you're confused about all these different business expense categories.

OP's situation sounds familiar - I was in the same boat with my electronics repair business. After 5 hours on hold trying to reach the IRS for clarification about categorizing my equipment purchases, I found Claimyr (https://claimyr.com). They got me connected to an actual IRS representative in about 15 minutes instead of waiting all day. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent clarified exactly how to handle my equipment purchases vs. materials, which saved me from making a costly mistake on my taxes. They explained that equipment like your 3D printer should be treated as depreciable assets, not as materials or other costs. This was especially important since I had about $3,000 in startup equipment.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway since I've been trying to reach the IRS about a similar business asset question for my food truck equipment. I was shocked when I got connected to an IRS agent in about 20 minutes after trying unsuccessfully on my own for weeks. The agent walked me through exactly how to categorize my kitchen equipment, ventilation system, and point-of-sale system. They explained that items over $2,500 generally need to be depreciated but pointed me to Section 179 which might let me deduct them fully this year. I would have continued incorrectly lumping everything as "supplies" without this clarification. Completely worth it for the peace of mind alone.

Just to add some clarity on the whole equipment categorization issue - I've been running a small electronics repair business for 3 years now. Here's what I've learned: 1. Small tools/equipment under $2,500 each: Use the de minimis safe harbor election (you have to actively choose this on your tax return). This lets you immediately expense things like your hot plate, soldering iron, etc. 2. Larger equipment: You have three options: - Regular depreciation (spread the cost over several years) - Section 179 deduction (deduct the full cost immediately) - Bonus depreciation (currently 80% for 2023) For a small business just starting out, Section 179 is usually best because you can deduct the full equipment cost now when cash flow might be tight. Also, keep EVERYTHING organized by category. I use a spreadsheet with tabs for: - Direct materials (go into final product) - Consumable supplies (used in production but don't go to customer) - Tools/equipment (under $2,500) - Major equipment (over $2,500) Trust me, you'll thank yourself next year at tax time!

I sometimes see people using Cost of Goods Sold vs Expenses incorrectly on their Schedule C. For your situation: COGS typically includes: - Materials that become part of your finished product (PCBs, components, packaging) - Direct labor costs to produce items - Factory overhead directly related to production Regular expenses include: - Equipment (either depreciated or expensed via Section 179) - Supplies used in your business but not part of final product (cleaning supplies) - Utilities, rent, etc. The distinction matters because COGS directly reduces your gross receipts, while other expenses are deducted after calculating gross profit.

Great discussion here! I've been running a small electronics business for about 2 years and went through this exact same confusion. One thing I'd add that really helped me was setting up separate tracking from day one for each category. What I do now is use different colored folders/envelopes for receipts: - Blue for direct materials (components, solder, packaging that goes to customers) - Green for consumable supplies (cleaning materials, gloves, etc.) - Red for equipment purchases This makes it so much easier when tax season comes around. I also photograph every receipt immediately with my phone as backup since thermal receipts fade over time. One mistake I made early on was mixing personal and business purchases on the same receipt. Now I always do separate transactions - it saves headaches later when trying to figure out what portion was actually business-related. The equipment depreciation vs immediate expensing decision really depends on your cash flow situation too. If you're profitable this year, Section 179 can save you money now. If you're barely breaking even, spreading it out with depreciation might be better for future years when you're more profitable.