I started purchasing audio-visual equipment for resale in2014. For the sake of simplicity, $10,000 of end of year inventory in 2014. No sales occurred in 2015. I added $5,000 in inventory with no sales. When TTx shows the "Inventory" and "Cost of Goods Sold" on the "Business Income and Expenses" summary overview list, it shows $10,000 for 2014 and "0" for 2015. In the "Report the Value of your Inventory, TTx shows $10,000 in the beginning of 2015 and I entered$15,000 for the EOY for 2015. In the "Tell us the Cost of Your Goods" window, TTx shows $10,000 for 2014 Cost of Purchases. I typed in $5,000 for 2015.
the Buss. Income & Expenses Summary" shows "0" no matter if I type in "0" or "$5,000" in this field.
What am I doing wrong?
I suspect that it is just showing your actual deduction on the tax return, which is $0.
Merely purchasing Inventory does not result in a tax deduction. The deduction happens when the product is sold (and therefore your inventory decreases).
I think, based on your description, tis would be the error: "In the "Tell us the Cost of Your Goods" window, TTx shows $10,000 for 2014 Cost of Purchases. I typed in $5,000 for 2015."
Purchase = what you spent to get new inventory as an Asset. Not as expense.
Cost, meaning your purchase price, of Goods Sold, and Sold means Gone. You stated that 2015 had no sales, so COGS is $0 for 2015.
$10,000 inventory purchased and still on hand for the end of 2014 + $5,000 new product on hand = total of $15,000 inventory asset on hand. Nothing sold = $0 COGS.
Cost of Purchases while on hand = inventory Asset value. It's not a cost of goods Sold, until they get Sold.
Gross Income from sales minus COGS = profit for what you sold. Example:
$15,000 on hand value
sell one third of it, for 100% markup
That means $10,000 value still on hand <== asset
$10,000 gross sales income <== $5,000 cost of products sold at 100% markup
minus $5,000 Cost for the goods sold and no longer on hand
= you made $5,000 profit, which was the plan, since you used 100% markup
And this is Fine: "the Buss. Income & Expenses Summary" shows "0" no matter if I type in "0" or "$5,000" in this field."
Having new inventory or not, makes no difference to Expense, because you had no sales.
The COGS secytion does not work the way you seem to think it does. I'm basing this on the wording of your post. First, some terminology.
- BOY (Beginning Of Year) Inventory balance - This is what "YOU" Paid for the inventory in your physical posession on Jan 1 on the tax year. It flat out does not matter when you purchased that inventory either. YOu could have purchased it 50 years ago. In your first year of business *OR* your first year of dealing with inventory, your BOY Inventory balance ***MUST*** be zero. That's because your BOY balance must be the exact same is your previous year EOY (End of Year) Inventory balance. If it's not, then you've got some 'splainin' to do to the IRS, and they will not accept your explanation for the difference.
So for that first year your BOY inventory "MUST" be zero, since there's no question the business had no inventory on Dec 31 of the prior year since either the business did not exist, or the business did not report inventory in that prior year.
- EOY (End of Year) Inventory balance - What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year. Again, it does not matter in what tax year it was purchased.
- COGS (Cost of Goods Sold) - What *YOU* paid for the inventory you actually sold in the tax year. Again, it does not matter in what tax year it was purchased.
Now of few examples:
BOY Inventory - $0 (what "I" paid for the inventory in my physical possession on Jan 1 of the tax year. This does "NOT" mean that I have no inventory. But if I do have inventory it means that I got it for free.)
EOY Inventory - $5000 (This shows that I ended the year with $5000 of inventory still in my possession and not sold.)
COGS - $1000 (This shows that I sold inventory during the tax year that "I" Paid $1000 for.
So the above indicates that I started the tax year with no inventory, I purchased a total of $6000 of inventory during the tax year, then sold $1000 of that inventory leaving me with $5000 of inventory at the end of the year.
BOY Inventory - $5000 (note this matches "EXACTLY" my prior year's EOY balance. )
EOY Inventory - $4000
COGS - $10,000
The above shows that I started the tax year with $5000 of inventory, purchased an additional $9000 of inventory and sold $10,000 of inventory leaving me with $4000 of inventory at the end of the year.
Now it's the COGS amount that gets deducted from your gross business income. You can't deduct what you pay for inventory until the tax year you actually sell that inventory. Again, it does not matter in what tax year you purchased and paid for that inventory either.
I just felt like posting the actual formula for COGS:
Beginning inventory + Purchases - Ending inventory = Cost of goods sold
In this instance, it appears that we have beginning inventory of $10,000 plus $5,000 in purchases for a total of $15,000. There were no sales leaving an ending inventory of $15,000. So, $15,000 less $15,000 equals $0 for COGS.
Thank you for giving a wide and clear perspective. I wish T.Tx would be clearer on "noting" this reasoning (probably common regarding inventory & COGs).
How you explained it made sense. How the "0" is presented in T.Tx. 2015 as your ending present Inventory (to me) is confusing...Every question set/grouping of T.Tx questions (& answers) should be clearly linked to the IRS Form# and line...
This way the answer of "0" would be paired with forms description of the answer as well. I follow your examples, they made sense. T.Tx still confuses me, but time to move on....
Yes!...That is a great answer to what probably happened in the C.O.G.s section. Thank you. Again It's the summary by T.Tx 2015 that is unclear. Listing the 2014
E.O.Yr. Inventory and the 2015 C.O.G.s next to each other...both fields should be clearly identified as such. Thanks again for taking the time to explain.!
Thank you for your response, just read and re-read it. Missed it earlier. Apparently I misunderstood what T.Tx 2015 was representing in the "0" answer....
Very insightful explanation.