splitting up a purchase between COGS and expense

This sole prop has always earned only service income, no merchandise.

In late 2020 I bought $5,000 of used equipment as a package deal, 3 widgets total, paid by check, check memo is not itemized. No other receipt.

Widget A I resold in 2020 for a profit, widget B I hope to resell soon in 2021, and widget C I kept for business use. This was my intention when buying.

How might I handle this on schedule C? It seems like A and B are COGS, and widget C is an expense, but without an itemized receipt I think I'm disallowed from expensing widget C under the $2,500 De Minimus Safe Harbor threshold? Would I need to depreciate widget C in this case? The proportional cost of widget C I would estimate as $2,000.

307

Expert Alumni

Feb 4, 2021 1:35:41 PM

Widgets A and B were purchased for resale, yes COGS.

Widget C was an expense since it was not for resale.

Widget B was inventory on Dec 31,2020.

Widget A was sold and the sale price is included in income.

Widget C -no itemized receipt, is there another way to show its approximate value, if you were audited? Comparable sales of the item? If you believe the item to be under $2,500 and have a way to show that is reasonable, then take the Safe Harbor - if that is your preference over depreciation.

The IRS on Deducting Expenses

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splitting up a purchase between COGS and expense