Schedule C Shipping Supplies Deduction

[genie187]

Hi.  On part 2 of Schedule C, when you deduct the cost of shipping supplies such as envelopes, do you only count the ones that you actually used or the total you bought that year?  For instance, say I have 1,000 items in my cost of goods and I also bought 1,000 envelopes to ship them.   But, I only end up selling 500 in the year, which means my cost of goods sold is only 500 items worth.  That makes sense to me, but since the envelopes aren't in my cost of goods in part 2, would I deduct the cost of the 1,000 envelopes I purchased or only 500 since I still have 500 that are unused?

[VolvoGirl]

You can enter the total cost you actually paid for all of them.  Yes it's what you paid for the whole year.  

[genie187]

Hi, sorry for the insanely late reply. What I was referring to was the excerpt from the IRS below. For instance, how would I know if the shipping labels or envelopes I buy to send products are incidental or not? If they aren't and I have some leftover at the end of 2022, it would seem to suggest I can only deduct the amount for the ones used in 2022, not what I actually paid for all of them in 2022. That's what's confusing me. 

• 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.

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[Mike9241]

generally, small businesses other than C Corps, partnerships with C Corp partners and tax shelters can use the cash method of accounting if annual average gross receipts for the 3-prior years doesn't exceed $26 million. (IRC 448). if you use the cash method there is no accounting for inventory so accounting for the labels becomes moot. It's an expense. 263A doesn't apply as regards to inventory costs.   per IRS PUB 538 . If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales.  once you account for inventories you can not change your method without filing form 3115 (page 18)

it's not clear that you account for inventories but if you do then you look to the following;

of minor or secondary importance, carried on hand without keeping a record of consumption, and no beginning and ending inventories are recorded

- is this true?  minor or secondary importance is something you have to decide and the IRS can always disagree 

if expensed is taxable income still clearly (fairly) reflected?

- again your opinion vs the IRS

for a frame of reference, the IRS allows businesses that do not have financial statements to expense (not even required to capitalize and depreciate) equipment costing $2,500 or less. 

The IRS announced in Notice 2015-82 that it has increased the de minimis capitalization (safe
harbor threshold from $500 to $2,500 for taxpayers without applicable financial statements
effective for costs incurred in tax years beginning on or after January 1, 2016