Can a business deduct all “supplies” (previously called inventory) purchased, under the “incidental supplies” exception?
No! If the taxpayer elects to use the safe harbors of Rev. Proc. 2000-22, they cannot treat the inventory/supplies as incidental, and must make a year-end adjustment for any remaining materials and supplies. Section 4 of Rev. Proc. 2000-22 states that “a taxpayer that does not want to account for inventories must treat merchandise inventory in the same manner as a material or supply that is not incidental.” A taxpayer carrying materials and/or supplies on hand may only deduct the cost of supplies when consumed and used in operation during the year. Who can use the “incidental supplies” exception? For the convenience of qualifying taxpayers, an exception to 1.162-3 allows certain taxpayers to deduct all the cost of supplies in the year purchased (i.e., no year-end adjustment) provided all four of the conditions are satisfied: • the supplies must be “incidental” that is, the supplies must be of minor or secondary importance to the taxpayer, • the taxpayer must not keep a record of consum
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