Supplies vs. Materials: Tax, COGS & Schedule C for Makers
Supplies and materials are taxed differently on Schedule C — mix them up and you'll deduct them wrong. Plain-English guide with real examples for handmade sellers.
It’s really important to know the difference between a supply and a material, as you need to handle them completely differently from a cost and inventory perspective.
Understanding the difference between them is crucial for completing your taxes correctly, and also to keep good inventory records.
In this blog post, we’ll explain what supplies and materials are, and show you how to best classify them correctly on your tax return. Let’s get started!
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What is a ‘Supply’?
So, let’s start with supplies. A supply falls into one of three categories:
a) Materials not used directly in the manufacture of your products (e.g. envelopes, packaging) or
b) Materials used in the production of your products that are not able to be inventoried due to an inability to accurately measure the material (e.g. thread) or
c) Materials that have a short shelf-life (e.g. batteries).
Common examples of Supplies
Some typical business examples of costs incurred that you would usually treat as a supply are:
- Packaging materials: bags, boxes, tissue paper
- Shipping supplies: postage, packing tape, shipping labels
- Difficult to measure items: thread, elastic
- Short shelf-life items: batteries, light bulbs
From a tax perspective, the IRS treats supplies as expenses. This means you can deduct the cost of your supplies in the year you purchase them.
You don’t need to track or inventory supply costs separately on your Schedule C, but you will need to keep receipts so that you can prove the cost if needed.
If you think your item is a supply, track it as an indirect expense rather than a material.
This is because you can only claim supplies in the year you purchased them. Materials you use to produce your products, on the other hand, count as an “asset until sold” — we’ll cover that in the section below.
What is a ‘Material’?
A material is anything you consume directly in the manufacture of your products — “consume” means anything you use up completely when making an item. You’ll also hear them called “direct costs” or “non incidental materials”.
If you are a small manufacturing business, this will be the majority of the items you’ll be dealing with on a day-to-day basis.
Let’s take a look at some example materials for a furniture maker:
- Lumber
- Nails
- Screws
- Hinges
- Upholstery
These are all direct costs to manufacture of a piece of furniture. The key point here is that once you’ve used them, they’re gone - you can’t get them back or reuse them.
Add materials to your inventory the moment you purchase them — the IRS then treats the total value as an “asset until sold”.
So what does this mean exactly? It means that you don’t claim the purchase of the materials up-front, rather you claim it in small amounts slowly over time as you sell the products containing the materials (call this tally your COGS - “cost of goods sold”). Read more about how important it is for handmade businesses to track their inventory here →
This is a tricky thing to track, so you’ll most definitely need inventory software or a pretty amazing spreadsheet to do the calculations that COGS require (read more about how to calculate your small business COGS here).
Otherwise, you’ll be needing to maintain a rolling average of your historical costs and manufacture costs over time yourself to ensure you are attributing the correct costs to each item you sell.
What are the key differences between a supply and a material?
Here’s a quick comparison of the key differences between a supply and a material:
The IRS treats supplies as expenses and materials as assets.
You can deduct supplies in the year you purchase them.
Materials you use to produce products count as an “asset until sold” — you don’t deduct them upfront.
You can only claim supplies in the year you purchase them.
Add materials to your inventory the moment you buy them.
The IRS holds the total value of materials as an “asset until sold” until you sell the finished product.
You don’t claim material purchases upfront — instead, you deduct them gradually as you sell the products that contain them.
Calculating COGS can be tricky, and you’ll need inventory software or a solid spreadsheet to do it accurately.
Are office supplies considered a supply or a material?
This is a common question we get, and the answer is that it depends on the item.
If the office supply item is something that you consume in the production of your product (like tape or glue for example), then it is generally considered a material. However, if the item is not consumed in the production of your product and is instead used in the general running of your business (for example, a stapler or paperclips), then it is considered a supply.
How are supplies and materials typically reported on a Schedule C?
All materials that go directly into producing your products belong on your Schedule C under Part III - Cost of Goods Sold. To complete this section, you’ll need to tally your inventory value at the start and end of the year, along with your total purchases. Only materials that went into products you actually sold during the year are deductible from your gross income.
Report supplies in Part II of your Schedule C, usually under Line 22: Supplies (not included in Part III).
Supplies you report in Part II are deductible from your gross income in the year you file.
Using software to track your supplies and materials
There are many software options available to help small businesses with their inventory management. Craftybase is one such solution that’s purpose-built for small manufacturing businesses, and offers a few key features that can help with supply and material tracking:
Automatically generates your COGS calculation based on your sales data, so you don’t need to do any manual calculations
Keeps track of your “asset until sold” value for you, and updates it dynamically as you make each sale
Lets you see at a glance which materials went into each product, and how much of the total cost each one contributed
If you’d like to try out Craftybase for yourself, you can sign up for a free 14-day trial. No credit card required.
Frequently Asked Questions
What is the difference between a supply and a material for a handmade business?
A supply is anything not directly used in making your product — such as packaging, packing tape, or shipping labels. A material is something consumed directly in production, like wax, resin, or fabric. The distinction matters for taxes: supplies are expensed immediately, while materials are tracked as inventory assets and deducted via COGS when the finished product sells.
How do supplies and materials appear differently on a Schedule C?
Supplies are reported in Part II, Line 22 of your Schedule C and are deducted in full in the year you purchase them. Materials used in production go through Part III — Cost of Goods Sold, where only the portion attributable to products you actually sold during the year is deductible. Getting these categories wrong can mean over- or under-paying tax.
Is thread a supply or a material?
Thread is typically treated as a supply, even though it goes into a finished product. The reason: it's nearly impossible to measure precisely how much thread is used per item. The IRS allows items that cannot be accurately inventoried to be treated as supplies and expensed in the year purchased. If you use high-cost threads and can measure them reliably, reclassifying them as materials may give you a more accurate COGS.
What does "asset until sold" mean for materials?
When you buy raw materials, the IRS treats them as an inventory asset — not an immediate expense. They sit on your books as value until you sell a product that contains them. At that point, the cost of those materials "flows through" to your COGS and becomes a deductible expense. This is why tracking which materials go into which products is essential — it's how you calculate the deduction correctly.
How does Craftybase help me track supplies and materials separately?
Craftybase lets you classify each item as either a material (tracked in inventory with COGS calculation) or an indirect expense (supplies, treated as a period cost). As you record sales, Craftybase automatically calculates how much of your material inventory has been used and updates your COGS — so at year end, you have accurate figures ready for Part II and Part III of your Schedule C without any manual tallying.
Conclusion
Supplies and materials are two very different things, but both play an important role in ensuring your business runs smoothly. By tracking both correctly, you’ll be able to get a clear picture of your business finances, assets and expenses and make informed decisions about your product pricing.
While we hope you found this article about supplies and materials helpful, please note that it is very general and is no substitute for professional accounting advice. We recommend always consulting with a qualified accountant or bookkeeper about your specific business needs.
