Basement bike mechanic LLC. Question on parts expense accounting.

[psweath]

I have a bike repair LLC that I run out of my basement. Sometimes customers bring me parts that they have purchased for me to install. Other times I will provide parts that I have purchased. For example, they come to me for a tune-up and I have a bike chain (that I have purchased) that works for them, and so I use that chain. They pay me for the tune-up and the chain in one check. So say the tune-up costs $100 (all labor) and the chain cost me $40. I get a check for $140.

For tax filing purposes, must I claim income of $140, and then claim expense of $40? Or would it be possible to only claim income of $100 and not claim any expense for this transaction since essentially the customer totally reimbursed my expense. 

It would sure make my rudimentary bookkeeping system a lot easier if I only had to report the labor dollars, and not expense the parts that are reimbursed.

Thanks for your thoughts,

Pete

[fanfare]

You have to report all your income, i.e. $140.

Doing it the other way is what IRS calls The Tax Gap.

@psweath 

[VolvoGirl]

Actually I think it should be easier to report all your income and then enter your expenses.  And  you should be expensing the items when you bought them, not when you got reimbursed for them which might even be in a different year.  

[ThomasM125]

It would not be technically correct to just report the net income as sales, although it may result in the correct amount of income and self-employment tax.  Another consideration is sales tax. Depending on the sales tax laws where you operate, you may be required to pay sales tax on labor and parts, so in that case you would want to report them separately in the case of a sales tax audit.

Also, in the case of an IRS audit, you wouldn't want your sales reported to be less than what you collected and deposited into your bank account, as that may require a lot of reconciling to substantiate your sales reported on the tax return.

[psweath]

Yup, was afraid of that. At least now I know what it's called. Thanks fanfare!

Pete

[psweath]

Thank you VolvoGirl. I appreciate it!

Pete