Do I need to report an inventory for a clothing company where I purchase blank shirts, design & screen print designs on them, package & sell them in my own retail store?

[akeith2002]

I have a business where I purchase blank shirts, design and screen print the designs on them and then sell them online. (All of this is done by only me).

Can the shirts be considered supplies (along with the ink) and do I have to report an inventory or can I write off the cost of the shirts in supplies and my retail sales as income?

[LudwigVan_fan]

Technically, No you don't have to maintain an inventory.  However, if don't maintain an inventory, your method of accounting must clearly reflect income and expenses.  This would mean

Treating inventory as non-incidental material or supplies.

If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid to acquire or produce the inventoriable items treated as materials and supplies in the year in which they are first used or consumed in your operations. 

Basically, you would treat your shirts as supplies; but, you can't deduct the full amount paid for the shirts if you have an amount of shirts left at the end of the year.  You would reduce your "supplies" by the amount paid for the shirts left at the end of the year.  In effect, an inventory.

I think an inventory would be easier to maintain and keep track of.

Beginning inventory    100 shirts              $1,000

Purchased                   300 shirts              $3,000

Goods available                                         $4,000

Ending inventory          150 shirts             ($1,500)

Cost of Sales                                             $2,500

See the IRS link for Publication 334

https://www.irs.gov/publications/p334#en_US_2018_publink10005555

[user17568968635]

Speaking from experience running a small clothing brand that buys blanks from wholesalers like YouApparel and ShirtSpace: the cleanest way to handle taxes is to treat blank shirts and decorating materials (ink, film, pretreat, packaging) as inventory that flows through Cost of Goods Sold (COGS), not general office supplies.

What works for me:

• Track inventory with a simple SKU list by style, color, size, and unit cost. Keep a running log of materials used per job. Do a quick count monthly and a full count at year end.

• On Schedule C, I report all sales as gross receipts and compute COGS as: beginning inventory + purchases + direct materials and production labor − ending inventory. My owner time is not deductible as labor. Mailers and boxes used to ship finished goods go in COGS.

• I do not expense everything when purchased. If I buy 500 blanks in December and only print or sell 200, only the cost of those 200 hits COGS this year; the rest is ending inventory.

If you qualify for the small business inventory simplification (Section 471(c)), you can treat inventory as materials and supplies or follow your book method. In practice, you still deduct when items are used or sold, not the day you buy them, so you still need basic counts.

Two tips:

1) Job costing beats guesses. Attach a quick job sheet to each order showing blanks pulled, ink or film used, and press time. It helps pricing, reorders, and taxes.

2) Sales tax is separate. Use a resale certificate when buying blanks and collect or remit sales tax in states where you have nexus.

Bottom line: treat blanks and production materials as inventory/COGS, keep consistent records, and have a CPA confirm your method.