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.
Most makers know they need to track their spending at tax time. What trips people up is the difference between supplies and materials. The IRS treats them completely differently, and getting them confused means filing your Schedule C wrong.
This isn’t a technicality. Mix these up and you could be claiming deductions in the wrong year, miscalculating your COGS, or understating your inventory value. None of those outcomes are fun to sort out with an accountant in April.
The good news: the distinction is actually pretty simple once you see it laid out. Under current small-business tax rules (see IRS Publication 334, Tax Guide for Small Business), supplies are expensed immediately while materials flow through your inventory as assets. That’s the whole split.
Last updated: May 2026. IRS classification rules for supplies and materials are unchanged from prior years. Always consult a qualified accountant for your specific situation.
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What is a ‘Supply’?
A supply is any item your business uses that does NOT go directly into the manufacture of your products, or that can’t be accurately measured per unit produced.
More specifically, the IRS defines supplies as falling 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 production that are impossible to accurately measure per item (e.g. thread, elastic) or
c) Materials that have a short shelf-life (e.g. batteries).
The key word in category (b) is “accurately”. If you can’t reliably say “I used exactly 2.3 metres of thread in this necklace”, the IRS lets you treat it as a supply and expense it in the year you buy it.
Common examples of supplies
Some typical examples of costs you’d treat as a supply:
- Packaging materials: bags, boxes, tissue paper
- Shipping supplies: packing tape, shipping labels
- Difficult-to-measure items: thread, elastic, glue
- Short shelf-life items: batteries, light bulbs
- Office materials: printer ink, pens, staples
From a tax perspective, the IRS treats supplies as expenses, not inventory assets. That means you deduct the full cost in the year you purchase them, reported on Line 22 (Supplies) in Part II of your Schedule C.
You don’t need to track or inventory supply costs separately on your Schedule C, but keep your receipts. If you think an item is a supply, track it as an indirect expense rather than a material.
What is a ‘Material’?
A material is anything you consume directly in the manufacture of your products. “Consume” means you use it up completely when making an item. You’ll also hear these called “direct costs” or “non-incidental materials and supplies” in IRS language.
If you run a small manufacturing business, materials are probably the majority of what you deal with day to day.
Let’s take a look at some example materials for a furniture maker:
- Lumber
- Nails
- Screws
- Hinges
- Upholstery fabric
These are all direct costs to manufacture a piece of furniture. Once you’ve used them, they’re gone. You can’t get them back or reuse them.
The critical difference from supplies: you add materials to your inventory the moment you purchase them. The IRS then treats their total value as an “asset until sold”.
So what does that mean exactly? It means you don’t claim the cost of materials when you buy them. Instead, you claim it slowly over time as you sell the products containing those materials. This tally is your COGS (“cost of goods sold”). Read more about how to track inventory as a small business.
Materials go through Part III — Cost of Goods Sold on your Schedule C. Only the portion attributable to products you actually sold during the tax year is deductible. The rest stays on your books as inventory value.
Calculating this accurately requires tracking which materials went into which products, and at what cost. It’s why you’ll want inventory software or a very solid spreadsheet.
What are the key differences between supplies and materials?
The core distinction is how and when you deduct each type of cost on your tax return.
| Supplies | Materials | |
|---|---|---|
| IRS treatment | Expense | Inventory asset |
| When you deduct | Year of purchase | When the finished product sells (via COGS) |
| Schedule C location | Part II, Line 22 | Part III — Cost of Goods Sold |
| Inventory tracking required? | No | Yes |
| Example | Packing tape, packaging | Wax, resin, lumber, fabric |
The practical upshot: if you buy $500 of packaging in January and $500 of candle wax in January, you deduct the packaging immediately on this year’s return. The candle wax sits as an inventory asset until the candles sell, possibly across multiple years.
How are supplies and materials reported on a Schedule C?
Materials that go directly into your products belong in Part III (Cost of Goods Sold) on your Schedule C. To complete this section, tally your inventory value at the start of the year, add your total material purchases during the year, then subtract ending inventory. The result is your COGS. Only what was sold is deductible.
Supplies go in Part II, Line 22 (Supplies not included in Part III). These are fully deductible in the year you file.
Getting the categories mixed up has real consequences. Claiming materials as immediate expenses (instead of routing them through COGS) inflates your deductions in the current year and understates your inventory value. The IRS calls this out specifically in Publication 334 for small manufacturers.
Are office supplies considered a supply or a material?
The answer depends on how the item is used, not what it’s called.
If an office supply item is consumed directly in producing your product (tape or glue you use on every item, for example), it’s generally treated as a material. But if the item runs your business generally rather than going into a specific product (a stapler, paperclips, printer paper), it’s a supply.
When in doubt, ask: “Does this item physically become part of my finished product, or does it just support my business operations?” Production use = material. General business use = supply.
Using software to track supplies and materials
Tracking the difference between supplies and materials manually sounds simple in theory. It becomes a headache fast once you’re managing dozens of ingredients across multiple products.
Here’s what that usually looks like without dedicated software:
| Manual tracking | Craftybase | |
|---|---|---|
| Classifying items | You decide supply vs. material for each item; easy to mix up at tax time | Each item is classified as a material (tracked in inventory) or indirect expense (supply) from the start |
| COGS calculation | Requires manual tallying of start/end inventory and purchases | Calculated automatically as you record sales |
| Schedule C prep | You export data and do the Part II / Part III split yourself | COGS and expense figures available at year-end without manual work |
| Inventory asset tracking | Spreadsheet formulas (easy to break) | Updated dynamically as you manufacture and sell |
Craftybase’s inventory and manufacturing software is purpose-built for small manufacturing businesses. It gives you:
- Automatic COGS calculation based on your sales data (no manual tallying)
- A running “asset until sold” value that updates each time you make a sale
- Clear visibility into which materials went into each product and how much each contributed to cost
If you’d like to try it out, you can start a free 14-day trial. No credit card required.
Frequently Asked Questions
What is the difference between supplies and materials 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 on Schedule C Line 22, 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. At year end, you have accurate figures ready for Part II and Part III of your Schedule C without any manual tallying.
Does the difference between materials and supplies matter if my business is very small?
Yes. Size doesn't change the IRS classification rules. If you manufacture products from raw materials, you're required to track inventory and use the COGS method for materials, regardless of revenue. IRS Publication 334 applies to all small manufacturers, not just those over a certain threshold. The earlier you get the classification right, the less painful tax time becomes as your business grows.
Wrapping up
Supplies and materials are two different things, and the IRS treats them completely differently on your Schedule C. Get the split right from the start and tax time becomes a lot less stressful. Get it wrong and you’re either over-paying or creating a mess you’ll need to unwind later.
The short version: supplies are expensed immediately (Part II, Line 22). Materials go through your inventory as an asset and are deducted via COGS when products sell (Part III).
By tracking both correctly, you’ll have a clear picture of your real costs, your inventory value, and what to deduct. That feeds directly into informed decisions about your product pricing too.
While we hope you found this article helpful, please note that it is general in nature and is no substitute for professional accounting advice. We recommend consulting with a qualified accountant or bookkeeper about your specific business needs.
