To Capitalize or Expense

[JM333]

Hi, I wonder if you could give me your opinion on my question regarding whether to capitalize (depreciate) or expense (deduct in current year) the purchase of the supplies (bags, pouches). The answer is easy for supplies I buy for use in current year. However, I purchase so much in 2019 that they last at least 5 years to come. If you asked why I bought so much. The reason is I purchased them from China factories because they are cheaper and the factories in China required mass production order. I have them shipped to US and I am storing them in storage warehouse for current year use and FUTURE year uses. The amount is a range of $60,000 USD to $70,000 USD. These are bags and pouches I use in daily sales of my jewelry products; they are packaging materials for sales of my jewelry. I am on cash basis. But these supplies will be used for at least 5 years to come. Hope you can give some opinion(don’t worry, I won’t quote you as legal tax advice). Thank you.

[JohnB5677 · Accepted solution]

You have an interesting situation, so rather than telling you what to do I will give you three alternatives.

1. You could expense the entire order stating that it is supplies , and in general that is the correct procedure.  However, You have presented to me that this will last several years.  Expenses generally deplete in a short period of time.
2. You can elect to depreciate the order.  This will take a fixed amount each year and allocate it to your expenses.
3. Finally, you can take it as inventory, with the understanding that it is used to "package" your jewelry.  In this case you would evaluate how much you have left each year and get the deduction based solely on what you used.

I think the second answer here is easier and more traditional, but the third answer would measure you business activity more accurately.

[JM333]

Thanks so much for your input!!