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

[NS1]

Trying to figure out the correct way to report materials and supplies costs for a small business filing Form 1065 with TurboTax Business. We buy small quantities of raw materials all the time to use in made-to-order jewelry. Sometimes we stock up in advance so we can handle rush orders etc, so naturally, at the end of the year, we do have materials that we have not yet used. We do NOT track inventory (as in how much material is used, when it is used, and how much is left exactly. That is pretty impossible given the nature of the materials, which is mostly raw metals). 

I see that Cost of Goods Sold and Inventory are separate sections, and as far as I can see one is NOT required to fill both (see screenshot). Since in our case there is no inventory tracked, can we report ALL that we have spent on materials during the year in the Cost Of Goods Sold section? Or should we leave COGS alone, and report all the materials that go into our products as part of the Supplies, in the Expenses section?

All instructions in TurboTax lead me to believe that the Cost Of Goods Sold should be the correct place to report the materials UNTIL I get to the screen for entering the number, where the instructions say the number needs to reflect only materials for products that "actually sold" in the given year (see screenshot - Purchases). Since we do not have the inventory part, and we have not sold absolutely ALL of the materials purchased during the calendar year, is it wrong to enter the total of all that we have purchased, regardless that we have not sold it in the same year?

[DDollar · Accepted solution]

I would just report it all as Cost of Goods Sold.  You don't need to track inventory, or report end of year inventory if you claim it all as COGS for the year.  You should distinguish between "supplies" and COGS.  For example, solder flux would be a supply, metals would be a COGS.

[NS1]

Thanks! That sounds strange about the flux. So flux is a "supply" because it evaporates and there is no trace of it left in the final physical product. Is that the logic? Only stuff that becomes a physical part of the product is COGS? So for example metal, solder, beads etc. are COGS, but flux, polishing compounds, cleaning solutions, patina... along with polishing wheels, burrs, drill bits etc. are Supplies?

[studioarthouseinc]

I too want to know this answer.

[Critter]

When all else fails read the Sch C instructions :   https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Inventory: page C-14

Exception for small business taxpayers. If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won't be treated as failing to clearly reflect income if your
method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine
your cost of goods sold in Part III of Schedule C.

Small business taxpayer.

You qualify as a small business taxpayer if you (a) have average annual gross receipts of
$25 million or less for the 3 prior tax years and (b) are not a tax shelter (as defined in section 448(d)(3)).

If your business has not been in existence for all of the 3 tax-year period
used in figuring average gross receipts, base your average on the period it has
existed, and if your business has a predecessor entity, include the gross receipts
of the predecessor entity from the 3 tax-year period when figuring average
gross receipts. If your business (or predecessor entity) had short taxable years
for any of the 3 tax-year period, annualize your business' gross receipts for the
short tax years that are part of the 3 tax-year period.
See Pub. 538 for more information.

Supplies :  page C-8

Line 22
In most cases, you can deduct the cost of materials and supplies only to the extent you actually consumed and used them in your business during the tax year (unless you deducted them in a prior tax year).
However, if you had incidental materials and supplies on hand for which you kept no inventories or records of use, you can deduct the cost of those you actually purchased during the tax year, provided that method clearly reflects income.   You also can deduct the cost of  books, professional instruments, equipment, etc., if you normally use them  within a year. However, if their usefulness extends substantially beyond a year, you must generally recover their  costs through depreciation.

[AndyVan]

Small arts and craft woodworker here - So shouldn’t raw materials (lumber/hinges/fabrics) and incidental supplies (glue/finishes/brushes etc) be separate categories? Does it make a difference? “Materials and supplies” is now the only available category for everything. 

[AnnetteB6]

In the end, the math will turn out the same.  However, if you prefer to keep the categories separate, you can enter either one or both categories in the Miscellaneous Business Expense section where you can include your own description for the expense.  

@AndyVan

[kegan1226]

I try putting in my costs of inventory and cost of goods sold, but when I put in the cost of purchase and then click the continue button, the cost is not shown under Your eBay business.

[AliciaP1]

You need to back up a screen and enter the amount for your beginning and ending inventory.  If you don't hold inventory you should enter 0.

@kegan1226