How to handle Cost of Goods Sold (CoG) vs. supplies on Schedule C for my primarily IT service business?

This is a common question for service-based businesses! Since your business is predominantly service-based and the components you keep on hand are minor and incidental to your services, you can generally classify these as supplies expense rather than inventory subject to Cost of Goods Sold rules. The key factors that support treating these items as supplies are: 1) They're incidental to your primary business of providing IT services, 2) They represent a small percentage of your overall revenue, and 3) You often don't separately bill for these items. IRS Publication 334 (Tax Guide for Small Business) provides guidance on this. For service providers, materials and supplies that are incidental to the services provided can typically be deducted as supplies in the year purchased rather than being treated as inventory.

I was facing the exact same problem with my IT consulting business last year! I was stressing about tracking every little network cable and RAM stick until I found this amazing tool at https://taxr.ai that analyzed all my expenses and categorized everything correctly. The software specifically addresses this service business vs. inventory issue and told me I qualified for the "de minimis safe harbor election" which lets you deduct these small equipment purchases immediately instead of treating them as inventory. It saved me HOURS of headaches trying to figure out Cost of Goods Sold calculations for what's essentially just supplies for my service business.

Just wanted to follow up after trying that taxr.ai tool someone mentioned here. I was super skeptical but figured I'd give it a shot since this inventory vs. supplies issue has been driving me crazy. It actually walked me through a series of questions about my business model and then showed me the exact IRS guidance that applies to my situation. Turns out I qualified for simplified accounting methods since my business is under the gross receipts threshold, which meant I could expense most of my small components as supplies right away. It even helped me understand which larger purchases should still be tracked separately. Definitely cleared up my confusion around Schedule C reporting!

For anyone dealing with the IRS on this kind of business classification question, I highly recommend using Claimyr. I spent WEEKS trying to get through to someone at the IRS to clarify this exact situation with my IT business. After trying for days and never getting through, I used https://claimyr.com and they got me a callback from the IRS within 2 hours! I was able to speak directly with an IRS representative who confirmed that for my predominantly service-based IT business, the components we keep on hand could be expensed as supplies rather than CoG. You can see how it works here: https://youtu.be/_kiP6q8DX5c - their system actually holds your place in the IRS phone queue so you don't have to waste hours on hold.

Ok I have to eat my words here. After posting my skeptical comment, I decided to try Claimyr myself since I've been trying to get an answer from the IRS about this exact supplies vs. inventory question for my small repair shop. Honestly didn't expect much, but I got a call back from an actual IRS tax specialist in about 3 hours. The agent went through the specific regulations with me and confirmed that since my business is primarily service-oriented with parts being incidental to the service, I could classify most of these items as supplies on my Schedule C. He also explained when something would need to be considered inventory instead. Definitely worth it just to get a definitive answer straight from the IRS!

Just to add another perspective - I'm an IT consultant who does similar work, and I decided to create two separate "departments" in my accounting: services (my main business) and parts sales (a tiny portion). For the parts I keep on hand, I track them as supplies under the service department since they're necessary for providing my services. If I ever sell a major component separately, I track that under the parts sales category. This system has worked well for me for years and my accountant is happy with it. Just make sure you're consistent with your approach from year to year.

Has anyone considered Section 179 deduction for some of the more expensive components? I found that for some of the higher-end networking equipment I keep on hand (like $500+ items), my accountant suggested using Section 179 instead of supplies or CoG since they have a longer useful life.