To report inventory and cost of good sold in TurboTax Online Self-employed version, follow these directions:
You may also try entering 'reporting inventory costs' in the search engine under the magnifying glass in the upper right hand corner of the screen.
See this TurboTax Help.
When you have a business that sells product, the way inventory is handled can seem convoluted and confusing when it comes to reporting it on a tax return. But once you "get it", it makes sense. It's that "getting it" that can be challenging at times. So here's the simplest explanation I can come up with.
First, the cost of your inventory is not deductible until the tax year you actually sell it. It does not matter in what year that inventory was purchased either. Could have been years ago, and even years before the business was even open. So here's a few definitions and simple examples.
- BOY (Beginning of Year) Inventory Balance - What *you* paid for the inventory in your physical possession on Jan 1 of the tax year. The BOY inventory balance *must* match the prior year's EOY (End of Year) inventory balance. If they do not match, then you'll have some explaining to do to the IRS. There is no reason the IRS wil accept either, for why they do not match. Therefore, in your fist year of business, or your first year of dealing with inventory, your BOY Inventory balance *must* be ZERO. No exceptions. Doesn't matter if you purhcased that inventory 20 years ago either.
- EOY (End of Year) Inventory Balance - What *your* paid for the inventory in your physical possession on Dec 31 of the tax year.
COGS (Cost of Goods Sold) - What *you* paid for the inventory you actually sold during the tax year.
Example 1 - First Year of Business:
You have on hand $1000 of inventory you purchased 3 years ago.
BOY Inventory Balance - $0
COGS - $2000
EOY Inventory Balance - $1000
The above indicates you started the year with no inventory. This is required since you ended the previous year with no inventory. (They *must* match). Then you sold $2000 of inventory during the year, ending with $1000 of inventory left on Dec 31 of the tax year. So at some time during the year you purchased/acquired a total of $3000 of inventory. Some may have already been purchased prior to Jan 1, and some may have been purchased throughout the year. Then you sold $2000 of that inventory leaving you with $1000 of inventory in your possession on Dec 31 of the tax year. The COGS (Cost of Inventory Sold) during the tax year is fully deductible from whatever you may have sold that $2000 of inventory for - thus reducing the business's taxable income.
Example 2 - 2nd year of business:
BOY Inventory Balance $1000 - This is what *you* paid for the inventory in your possession on Jan 1 of the 2nd year. As required, his matches exactly your prior year's EOY Inventory Balance.
COGS - $5000 - This is what *you* paid for the inventory you actually sold during the 2nd year of business.
EOY Inventory Balance - $5000 - This is what *you* paid for the inventory in your possession on Dec 31 of the 2nd year.
The above indicates that you started the 2nd year with $1000 of inventory, then at some point during the year you purchased $9000 of inventory bringing the total to $10,000 of inventory for the 2nd year. Then during that same 2nd year you sold $5000 of that inventory leaving you a balance of $5000 of inventory in your possession on Dec 31 of the 2nd tax year.
The above examples are a bit simplistic. But should help you "wrap your head around it" somewhat.