Cost of Goods Issue

[grym]

So I work and have a side business on eBay. When I calculate my taxes without eBay included I show a return of $750. The eBay income is say $10,000 net sales with a Cost of Goods of say $9500, so a profit of $500. When I enter that in Turbo Tax desktop my federal tax owed jumps by over 750 wiping out any return, which can't be right for what amounts to only $500 in extra income. It seems to be the inventory calculation that is messing things up. Say I started with $4000 in inventory and I ended with $4000 in inventory and spent $9500 to buy the goods that I sold. As soon as I enter the $10,000 in income the federal taxes owed jump up by $750 and even after I enter the end inventory and purchases and it shows a COG of $9500, the taxes do not come back down. Something isn't working right. Even if I adjust it to a negative profit it still shows a negative return wiping out the $750 return I was getting before adding the business info. Anyone know what's going on?

[PatriciaV]

Please clarify what type of return you are preparing and what version of TurboTax you're using. Have you reported inventory in the past? How was the eBay income reported to you?

[grym]

I am using Turbo Tax 2025 Home and Business for Windows 11. Yes, I have reported inventory in prior years. My sales income was just under the 20,000 limit for 2025 so eBay did not generate a 1099k this year. I got my sales numbers from Sales Reporting page. I am confident my net sales numbers are solid. 

So I calculated my tax return with just my non-eBay work and it calculates a $750 return. If I enter a business income of 0 and enter the same ending inventory as starting inventory ($4000) as a test, Turbo Tax immediately adjusts my tax return from a $750 return down to a -$105 (tax owed). What is going on? Why would 0 income and no change in inventory cause a huge change in calculated tax?

[grym]

So I started my business section in Turbo Tax by putting in the inventory. My beginning inventory was $4000 and I entered my end inventory as $4000, so no change at all. Turbo Tax immediately adjusted my return amount from a $750 return down to -$105 just based on this inventory entry. If my inventory stays exactly the same and I have reported an income of 0 so far, so why did my tax owed change by over $850 from this inventory entry?

[DianeW777]

It depends on whether there is actually a net profit on the business once it's all said and done. With TurboTax Desktop you can view the forms to see what changes on your Schedule C and Schedule SE for example. Also, it depends on whether you have any qualified business income (QBI) loss carryover or a deduction from the current tax year.

I would like to address the inventory for you because the rules changed with the Tax Cuts and Jobs Act (TCJA). You can decide if you want to continue to carry your inventory (cost of goods), or expense everything.  See the option you have below.

Inventory options (COGs): 

1. According to Tax Cuts and Jobs Act (TCJA), businesses with gross receipts below $30 million for the past three years are considered eligible to use the cash method of accounting for their inventory.  This allows you to be free of inventory tracking on a regular basis.
   • This means you can enter all of your purchases for resale as materials and supplies to reduce your current year income instead of using the inventory section. Using the inventory section requests the cost of the products on hand as of December 31st and that amount is on hold until sold which will not reduce your income for the current tax year, but will be used in the following year when you actually sell your merchandise. This repeats each year if you choose it.
2. You should always track your inventory restocking costs and labor if it's part of the actual inventory cost and deductible against your business income (1099-K, all cash transactions or bartering).

@grym