Exempt from Inventory Reporting

[JF300]

I am a sole proprietor with less than $200k in sales, and I have a rolling inventory of goods on hand for sale at all times. I have read, and would like it confirmed,  whether or not my business is exempt from reporting an inventory since gross receipts are less than $1M. The past number of years I thought I was doing the right thing by reporting inventory and thus have been paying a lot of money in taxes. Is it possible to not report an inventory and only list the COG expense under materials and supplies as I have read? Also, can I amend my previous years of returns and possibly recoup some of that tax money I spent by reporting my inventory?

Thanks so much!!!

[taxes4sumting]

small business taxpayers don't have to keep an inventory with average annual gross receipts of $26M or less for the 3 prior tax years. Not reporting an inventory shouldn't cause your taxes to decrease compared to reporting as materials or supplies....the cogs number should be about the same.

[Carl]

Is it possible to not report an inventory and only list the COG expense under materials and supplies as I have read?

Sure can.

Also, can I amend my previous years of returns and possibly recoup some of that tax money I spent by reporting my inventory?

wouldn't recommend that. Just sell the remaining inventory you presently have reported in the COGS section. Any new inventory you get you can expense as materials and supplies. Once the inventory in COGS is sold that will make your EOY Inventory Balance $0 for your 2020 tax return, and that would make 2020 the last year you utilize COGS.

In the long run though, you'll find it makes no difference in your taxes over time. I myself prefer to use COGS because it does make the tracking and math a whole lot simpler. Simplicity comes in handy if you ever get audited.

[Rick19744]

So a couple of things here (well maybe more than a couple):

• As noted in a previous response, small businesses (other than a tax shelter) that meet the $26 million (for 2019) gross receipts test under Code Section 448 can use the cash method even if, the taxpayer would otherwise be required to use the accrual method of accounting due to the presence of inventories.
• To satisfy this test, the average annual gross receipts of the taxpayer must be $26 million (for 2019) or less. The test is based on the three tax-year period before the testing year. The $26 million (for 2019) threshold is applied to each test year based on the average annual gross receipts for the three tax-year period ended immediately before the test year.  You clearly meet this test based on your facts.
• Taxpayers that qualify to use the cash method of accounting because of the $26 million (for 2019) gross receipts test are not subject to the Section 263A UNICAP requirements for any tax year starting after 2017. Instead, the cost of the merchandise is accounted for in the same manner as materials or supplies that are not incidental; that is, it must be accounted for on the cost basis of accounting.
• This provision (small taxpayer) requires cash method taxpayers to expense the cost of these items only as they are consumed or used in the taxpayer's business or, if later, when the taxpayer pays for the items. Thus, the taxpayer must capitalize these costs and deduct them by adjusting the balance via perpetual inventory records or taking physical inventory at year-end to determine the amount of year-end supplies and materials. 
• The ability to expense any and all "inventory" for a small taxpayer only applies to incidental materials and supplies.
• The above is a confusing area and relatively new.  The TCJA Committee Reports state that: “Consistent with present law, a deduction is generally permitted for the cost of nonincidental materials and supplies in the taxable year in which they are first used or are consumed in the taxpayer's operations.  Essentially the handling of nonincidental materials and supplies should be in accordance with Revenue Procedure 2002-28.  According to the rules in the revenue procedure, nonincidental materials and supplies are deductible in the year they are actually used or consumed in the taxpayer's business.
• Here is a simple example:  Sally Spaniel operates her veterinary practice through a calendar year corporation. In addition to providing small animal health services, Sally sells pet supplies from her clinic. For both business activities, she uses the cash method of accounting and accounts for inventoriable items (such as pet food) as nonincidental materials and supplies. In December 20X8, she bought and paid for pet food that was sold in 20X9, after her holiday break. Sally cannot deduct the cost of the pet food until 20X9 because that was the tax year the pet food was provided to her customers.
• Finally, you also need to keep in mind, that since you used your "old" method of accounting for more than one year, if you decide to change, you would need to complete and file a change in accounting method form 3115.
• Keep in mind, that this "new" method would most likely arrive at the same place; you just don't have to technically call it inventory.
• Also keep in mind, that changing methods isn't creating any new deduction, it's just timing and may cause swings in your income.

I would recommend that you consult with a tax professional where you can have a one on one and understand the rules so you can complete an accurate return and minimize your time completing the return.

Read this brief discussion and pay particular attention to the second half of the discussion regarding the footnote to the Joint Committee on Tax Report on this matter.

https://www.eisneramper.com/inventory-tax-blog-0919/

[chuck816]

This was posted by Turbo Tax just about a month ago:

Large businesses that purchase, produce, and sell merchandise to generate income usually keep inventory and use the accrual method of accounting. The inventory's value at year-end is subtracted from its value at the start of the year (plus purchases made during the year) to arrive at the cost of goods sold (COGS) for that year.

However, if your business' annual gross receipts for the last three tax years average out to $26 million or less per year, you can opt to use the cash method and expense the cost of inventory at the time it was purchased, rather than waiting until after it's been sold.

In TurboTax, you can report these costs in the inventory section as COGS or in the expenses section as supplies. Either way, you don't have to report inventory but you do need to carefully track what you paid for the products, materials, and supplies that go into your inventory.

https://ttlc.intuit.com/community/tax-topics/help/do-i-need-to-report-inventory/00/1700549

Based on that, I would say reporting BOY and EOY inventory is not required for companies with 3-year averages of less than $26 million.  Only COGS for sold inventory is required to be reported.

If I report BOY and EOY inventory this year, AND didn't sell any of that inventory, then my taxable income increases.  Which is infuriating that IRS is taxes us on purchased inventory.

I am looking for answers on this too, please correct me if I am  wrong.