Basics of inventory and buying wholesale and selling retail

[Kalyse]

I have moved from only doing design work to selling products online. I buy at wholesale and sell for a profit. How do I claim only the profit when I get a 1099 for the retail amounts? I don't know even how to begin writting off those those wholesale costs.

[SusanC6]

If you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise.

Accrual accounting for inventory is a method of accounting in which your cost of goods is tracked for each unit individually.  The cost amount of the item is included in Cost of Goods Sold (an expense) only when the item is sold.  Before the item is sold, the amount is treated as an asset, Inventory. 

This method matches revenues generated from the sale of goods with the costs of those goods.

The formula for calculating Cost of Goods Sold is:

Beginning Inventory + Purchases (For Resale) - Ending Inventory

There are various ways to maintain inventory records.  If you do not have a lot of inventory, you may keep track  the item, cost and sale date on something as simple as an spreadsheet.  If you have many items you may want to look at purchasing some type of inventory management software.

When you file your taxes each year, the retail amounts will be reported as income, the Cost of Goods sold will be reported as the expense and the result will be the net profit.

[KimberW]

The way that you report your income and expenses generally looks like:

• Start with Gross Income (all income received before any inventory, expenses, or fees)
• Then subtract: Cost of Goods Sold (these are your expenses for purchasing or creating inventory to sell)

(This gives you an amount commonly called "Gross Profit".)

• Then subtract: Expenses (these are the remaining expenses: wages, business licenses, office supplies, accounting fees, etc.)

The result of these steps is your "Net Profit" (or "Net Loss") and is what will be included in your taxable income for the year.

That is very simplified, and I will include links to articles with more details below. For your question, you would report the full amount that you received on your 1099s as your Gross Income. From that, you will subtract the cost of purchasing your wholesale items (your Cost of Goods Sold). And then subtract your other business expenses that are not directly related to your inventory.

Reporting Self-Employment Business Income and Deductions  (See Part III about Costs of Goods Sold)

Do I Need to Report Inventory? 

Form 1099-K Decoded for the Self-Employed 

Please note that these links are mostly directed at people who report their business income on a Schedule C (sole proprietors or Single Member LLCs). But, the idea of separating gross profit, cost of goods sold, and ordinary expenses applies to all business types.

Thank you for participating in this event!

-- KimberW

[camwharton]

I would add the caveat that you only have to conform with GAAP accounting when you make over $25 million.  If not you can go full cash and expense inventory as you purchase it.  There may be benefits for using accrual accounting but it is not required for most small and medium sized businesses.