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Trying to get my inventory/ Cost of goods sold figured out.

2016 was my second year of business selling clothing.  I did not keep inventory in either year.  My accountant for 2015 put all my expenses for clothing I bought and had printed under cost of goods sold even though I didn't sell them all. 

I decided to do taxes on my own this year since I didn't feel like there was much my CPA had to do last year besides enter numbers I gave him.  

I've learned a lot that I never knew in talking to him last year.  My main concern is my inventory and cost of good sold.  I've never kept inventory and I want to do the right thing on my taxes this year, but I don't want to cheat myself. What should I do?

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Level 7

Trying to get my inventory/ Cost of goods sold figured out.

Even if your sales are under $1 million, if inventories are a material income producing item, (and if you're in the business of selling clothing, I would think inventory is a material item) you MUST maintain inventories.  You can use the cash method of accounting....BUT still must use inventories.

You have two choices.  If 2015 was your first year of business, you can amend 2015, and include beginning and ending inventories and recalculate your COS and your net profit (it will go up)...and then carry 2015's ending inventory into 2016.

Or you can change your method of accounting, and file your return based on the new method of accounting.  You'll probably have to file Form 3115, Change in Method of Accounting.  It's been a long time since I've worked with that, read the rules on if, when, and how to file the Change in Method of Accounting.


I believe that even if you might not need to keep "inventories"; you would have to account for the clothing as supplies and deduct the cost of the clothing either when sold, or when paid for....whichever is later.  Thus, I don't think that you can pay for the clothing in 2015 and deduct the cost if the clothing wasn't sold until 2016, etc.

But read the publication and the references in the publication carefully.

See also Pub 535 for general business expenses

**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**