Service business materials and supplies

Forum|Forum|1 year ago
June 24, 2025
3 replies
9 views

Sorry if something like this has been asked before but I'm getting conflicting information regarding whether or not a service based, audio video company needs to count the wire they purchase and use on jobs as inventory? If they rewire a house, they invoice the customer for the service and not the materials used. They have anywhere from $20K to $50K of wire on hand at all times and claim it would be almost impossible to calculate the value at a given time.

ProSeries Professional

Best answer by BobKamman

Exception for Small Business Taxpayers
If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. A small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement (as defined in section 451(b)(3)). If it does not have an applicable financial statement, it can use the method of accounting used in its books and records prepared according to its accounting procedures. See Regulations section 1.471-1(b). If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.

https://www.irs.gov/pub/irs-pdf/p538.pdf

Taxprohere

Level 7

I'd consider it supplies. Purchase of wire is not held out for sale itself, like a computer shop that repairs but also may sell extra keyboards and mice; those accessories having a beginning and ending inventory.

Or the majority of us, we buy cartons of paper for the year, and hopefully have a few sheets left over for the rest of the year. Not inventory.

BobKammanAnswer

Level 15

Exception for Small Business Taxpayers
If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. A small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement (as defined in section 451(b)(3)). If it does not have an applicable financial statement, it can use the method of accounting used in its books and records prepared according to its accounting procedures. See Regulations section 1.471-1(b). If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.

https://www.irs.gov/pub/irs-pdf/p538.pdf

A

Avs19Author

Level 6

They're considered a small business on the cash method. It sounds like they'll be safe expensing it and not including it as inventory. Thanks for your help!

T

TaxGuyBill

Level 15

@Avs19 wrote:

They have anywhere from $20K to $50K of wire on hand at all times

With that much wire, it seems unlikely this is their first tax return.

How have they been treating it before? You can't randomly change Accounting Methods unless Form 3115 is filed to change it.

Sign up

Login with SSO

Let's get you signed in

Login with SSO

Scanning file for viruses.

This file cannot be downloaded