Cost of Goods Sold (NO Inventory) VS Supplies as Expenses

[qualityautobody]

Trying to figure out the correct way to report car parts cost for a small business filing Form 1065 with TurboTax Business.  Where should I put the cost of the replacement parts ?

[KarenM90 · Accepted solution]

If you are an auto repair shop, I would recommend that car parts are cost of goods sold. 

If you are an auto repair shop, you are actually "selling" the parts themselves as part of your service.  

Supplies and expenses for such a shop would be oil, rags, etc.

[Carl]

It's simple really. Though I do admit it can be difficult to "wrap your head around" in the process of understanding it.

You treat your parts and other things that you actually sell to customers, as inventory. It doesn't matter if you sell it as is, like in a box "off the shelf" directly to the customer, or if you sell as as "a part of" the repair service you provide.

You are already including what you paid for the part on the invoice you issue to the customer. So the customer is paying for that part, and the costs billed that exceed what *you* paid for the part is your labor.  So you have no need to report what you paid for that part anywhere in your tax return outside of the "Inventory/Cost of Goods Sold" section.

Since you don't actually "carry" an inventory that you sell to customers, that makes COGS easy for you.

BOY (Beginning of Year) Inventory balance $0 (What "YOU" paid for the inventory in  your physical possession on Jan 1 of the tax year)

EOY (End of Year) Inventory balance - $0 (What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year)

Cost of Goods Sold (COGS) - $5000 (What *YOU* paid for the inventory you *actually* *sold* in the tax year. This is the amount that will be deducted from your gross taxable business income so you aren't taxed on it.)

It's that simple. But understand this.

Your BOY Inventory balance *MUST* match your prior year's EOY Inventory balance. (In your case, zero) If it does not match, then you have some 'splainin' to do to the IRS and they flat out will *not* accept any reason or excuse you may give them, other than "I screwed up. How much is my fine?"

[webhale]

I need to understand a business COGS scenario. In a year, I sold parts that I had in inventory for $2,160. The parts withdrawn from inventory had a value of $1,450. The BOY inventory was $9,787 and the EOY inventory was $1,062. $1,725 in purchase parts were added to the inventory. The cost to ship the parts was $260.

What is the COGS for the year?

[Carl]

You didn't specify, so I am going to assume that 2019 was your first year dealing with inventory. Understand that what you pay for inventory is not a deductible business expense until the tax year you actually sell that inventory. It just flat out does not matter if you purchased the inventory 50 years ago either.

In a year, I sold parts that I had in inventory for $2,160.

So with 2019 being your first year dealing with inventory, your BOY inventory balance ***MUST*** be zero. Period. End of story.

This is because your current tax year (which is 2019) BOY inventory balance *must* match exactly your prior tax year EOY inventory balance. There are no exceptions to this. Since your business did not exist in 2018, or your business did not carry/report inventory in 2018,  that means your 2018 EOY balance was ZERO. Since your 2019 BOY inventory balance must match your 2018 EOY inventory balance, that means your 2019 BOY inventory balance *MUST* *BE* *ZERO*. It flat ot does not matter if you actually purchased that inventory many years ago either.

The parts withdrawn from inventory had a value of $1,450.

I assume by "withdrawn from inventory" that you mean you actually sold those parts to costomers. The "value" of those parts just flat out does not matter at thes specific and explicit point in time. What matters here is what *YOU* paid for those parts from the suppler, regardless of what year you purchased and paid for them.

The BOY inventory was $9,787

Does that match "exactly" the EOY inventory balance reported on your 2018 tax return? It absolutely positively must, with no exceptions.

and the EOY inventory was $1,062. $1,725 in purchase parts were added to the inventory.

Because of the clarification I need and have requested, I just can't work with your numbers at this time, until you either provide the correct numbers and confirm beyond any doubt that the numbers you have provided are in fact, being interpreted correctly by me.

The cost to ship the parts was $260.

I'm ignoring shipping costs at this time, because that's a physically separate expense that's handled and dealt with outside of COGS *UNLESS* it is included in the invoice you received from the supplier as "a part of" the cost of the part. If the latter, then it's just included in the cost of the part. I personally always separate shipping costs and claim it as a physically separate expense outside of COGS, because if I don't, it tends to become a paperwork nightmare in short time trying to do the math at tax time.

Hang in there and when you "Get it" that light that comes on over your heading will be blinding when you see the simplicity of this. 🙂

[Anonymous_ · Accepted solution]

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@webhale wrote:

What is the COGS for the year?

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The following is the basic formula for calculating COGS. It is neither open to dispute nor interpretation and can be found all over the internet.

• Beginning Inventory (at the beginning of the year)
• Plus Purchases and Other Costs
• Minus Ending Inventory (at the end of the year)
• Equals Cost of Goods Sold.

[webhale]

Thanks, I've got it now.