It's no special formula really. But if you've never dealt with inventory before, the COGS section (Cost of Goods Sold) can take a bit to wrap your head around, the first time you deal with it. I do believe I can explain it to you though, in terms one can get their head around.
First, understand that when dealing with inventory, what you paid for that inventory is not a deductible business expense until the tax year you actually sell it. Doesn't matter that you may have purchased and paid for it 50 years ago either. Understand that inventory is dealt with in the Cost of Goods Sold (COGS) section of the program.
You are asked for three basic things in COGS (there's more than three, but I'm only addressing the three that matter here).
1) Beginning Of Year (BOY) inventory - What *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year. It *DOES* *NOT* *MATTER* in what tax year you paid for it either.
2) End of Year (EOY) Inventory - 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 you paid for it eather.
3. Cost of Goods Sold (COGS) - What *YOU* paid for the inventory that you *actually* *sold* during the tax year. It *DOES* *NOT* *MATTER* in what tax year you paid for it either.
Now the "golden rule" here is that you BOY inventory balance of a tax year ***MUST*** match exactly your EOY inventory balance of the previous year. If it does not, then you will have some 'splainin' to do to the IRS. On top of that, there is "NO" explanation that the IRS will accept as valid either. That's because there is no reason whatsoever for your BOY balance of one year, to not match exactly your EOY balance of the previous year.
Now that I've explained the above, understand that in your first year of business *or* your first year of dealing with inventory in your business, your BOY Inventory balance *MUST* *BE* *ZERO*. This is not up for debate or discussion. The reason for this is because either your business did not exist on Dec 31 of the prior year, or your business did not deal with inventory at all in the prior year. So the only possible way for your BOY inventory balance to match your prior year's EOY balance, is if the current year's BOY balance is ZERO. Period. (Remember, what you paid for inventory *is* *not* *deductible* until the tax year you actually sell it. So "when" you paid for that inventory *does* *not* *matter*. )
So here's a few examples of how this works.
1st year of business:
BOY Inventory Balance - $0
COGS - $2000
EOY Inventory Balance $5000
The above indicates that on Jan 1 of the tax year I had ZERO inventory in the physical possession of my business.
Then after selling $2000 worth during the tax year, I had $5000 of inventory left on Dec 31 of the tax year. So this shows my business purchased/acquired a total of $7000 of inventory in my first year of business, and actually sold $2000 worth of that inventory.
2nd year of business:
BOY Inventory Balance $5000
COGS - $7000
EOY Inventory Balance $1000
The above shows I started my 2nd year of business with $2000 of inventory. It matches exactly my prior tax year's EOY balance. So no problems or issues there.
During the year I sold $7000 of inventory leaving me with $1000 of inventory on Dec 31 of the tax year.
The above shows that during the year I actually purchased an additional $3000 of inventory bringing my total inventory for the entire year to $8000, and after selling $7000 of that inventory I ended the tax year with $1000 of inventory left in my possession.
