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ekilada
Level 2

Difference between Inventory / Cost of Goods Sold AND Business Expenses

On Turbo Tax: Business Income and Expenses Tab.

 

What is the difference between the following two items:

1. Inventory / Cost of Goods Sold 

2. Business Expenses

 

In particular, I own wood working business and I had to buy a lot of equipment to manufacture the products I am selling. My assumption is; I shouldn't put the equipment cost in the Inventory/Cost of Goods sold; and instead I should put it in the business expenses. Is that right?

 

Thanks,

Eliyah

 

1 Best answer

Accepted Solutions
ColeenD3
Employee Tax Expert

Difference between Inventory / Cost of Goods Sold AND Business Expenses

Equipment can be treated in various ways due to recent tax law changes. It is an asset, which means it has to be depreciated. While it is not a part of COGS, the electricity or fuel needed to run it is.

 

As an asset, you have the choice to expense all or part of it. It is not an expense until you formally elect it to be one.

 

You may either take a Section 179 or bonus depreciation, or you may include it as a DeMinimus Election, if it meets the rule.

 

De Minimis Safe Harbor Election


This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

 

 

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

  • You don't have an applicable financial statement (most people don't).
  • You have a consistent process for how you record expenses and assets.
  • You record these items as expenses on your books/records.
  • The cost of each item as shown on your receipt is $2,500 or less.

 

 

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View solution in original post

4 Replies
ColeenD3
Employee Tax Expert

Difference between Inventory / Cost of Goods Sold AND Business Expenses

Equipment can be treated in various ways due to recent tax law changes. It is an asset, which means it has to be depreciated. While it is not a part of COGS, the electricity or fuel needed to run it is.

 

As an asset, you have the choice to expense all or part of it. It is not an expense until you formally elect it to be one.

 

You may either take a Section 179 or bonus depreciation, or you may include it as a DeMinimus Election, if it meets the rule.

 

De Minimis Safe Harbor Election


This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

 

 

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

  • You don't have an applicable financial statement (most people don't).
  • You have a consistent process for how you record expenses and assets.
  • You record these items as expenses on your books/records.
  • The cost of each item as shown on your receipt is $2,500 or less.

 

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

ekilada
Level 2

Difference between Inventory / Cost of Goods Sold AND Business Expenses

Thanks for pointing out that I could treat the equipment as assets. 

 

Best regards,

Eliyah

Carl
Level 15

Difference between Inventory / Cost of Goods Sold AND Business Expenses

In a nutshell:

Items/Equipment used in the production of product you will sell are assets and get listed in the Business Assets section and depreciated over time.

COGS needs a bit more of a breakdown.

Beginning of year (BOY) Inventory - What *you* paid for the inventory in your physical possession on Jan 1 of the tax year. If 2020 is your first year of business or the first year your business reports inventory, then your BOY Inventory Balance *MUST* be zero. It does not matter in what tax year the inventory was purchased either.  Additionally, your BOY Inventory Balance must match exactly the prior year EOY (End of Year) Inventory Balance with no exceptions. (That's why in your first year, the BOY Inventory Balance has to be zero with no exceptions.)

End of Year (EOY) Inventory Balance - What *you* paid for the inventory in your physical possession on Dec 31 of the tax year. It does not matter in what tax year the inventory was purchased either.

Cost of Purchases - Apparently, TTX renamed this from"Cost of Goods Sold". Enter in this box what *you* paid for inventory you actually sold in the tax year. It does not matter in what tax year you paid for it either.

Purchases withdrawn for Personal Use - What "you" paid for inventory you decided not to sell *ever*.

Labor Costs - Typically this will be zero. If you have W-2 employees then you already claimed these costs as wages paid to your employees. If you paid a 3rd party contractor and issued them a 1099-MISC or 1099-NEC for what you paid them to produce your product, *and* you did not claim this business expense elsewhere, then you can claim it here.

Materials and Supplies - These are costs for things that are "consumed" in the production process, and they may or may not become "a part of" the finished product you sell. For example, nails, screws, washers. etc. would be examples of things that become "a part of" the finished product. But figuring costs such as "cost per nail" is a bit cumbersome. So if you purcased 6 boxs of nails at $10 a box and you used 5 1/2 boxes during the year, you can claim the cost of all 6 boxes here. Just make sure you don't claim that 1/2 box of left over nails you use next year in your production process.

Materials and Supplies also includes those items that are "consumed" during the production process, yet do not become "a part of" the finished product. Examples would be sand paper, furniture polish, mineral spirits, denatured alcohol, etc.

Other Costs to Prepare for Sales - This would include things like displays if you have a store front, as well as boxes and packaging, and possibly even shipping costs if not claimed elsewhere.

 

martinmarks1919
Level 8

Difference between Inventory / Cost of Goods Sold AND Business Expenses

Cost of Purchases - Apparently, TTX renamed this from"Cost of Goods Sold". Enter in this box what *you* paid for inventory you actually sold

This is not right....TTX didn't rename the cost of goods sold to cost of purchases and you don't enter what you paid for inventory you actually sold in this box......you enter what you paid for inventory purchases. Cost of purchases is right there on SCH C where it's always been and it is what was paid for inventory purchased during the year, not what was paid for the inventory that was actually sold......inventory that was actually sold is the COGS and COGS is calculated by adding the cost of purchases made during the year to the beginning inventory and then subtracting the ending inventory. 

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