How to categorize cost of goods sold when there is no inventory

[jmdooley9]

Ex. My client decides they want to order prints of some photos I took for them. They purchase prints through me, and I order the prints from a third party printer that costs X dollars. I consider that X dollars COGS, but those prints are never kept as inventory. How do I categorize this expense for tax purposes?

[DS30 · Accepted solution]

It depends

If you do not have any inventory to report but want to enter your purchased materials/products that you sold under this section (to report as Cost of Goods Sold), you will still need to select "yes" for inventory but report zero "0" for both starting and ending inventory. You can put the Cost of Goods Sold relating to purchases under this section (See Screenshot)

You also have the choice to include these costs as non-incident materials and supplies under either cost of goods sold or supplies.

Usually, this would be part of your cost of goods sold (and any remaining unsold product would be included in inventory). However, as part of the small business exemption, these items that would have been included in the business inventory may be deducted the year that either the item is sold or when it is purchased, whichever is later. 

This exemption from recognizing inventory applies to sole proprietorships or very small businesses. To be exempt from reporting inventory, an individual taxpayer must not annually earn more than $1 million, as determined by annual gross receipt amounts for the past three years.

Please link this link for more information on IRS - Cost of Goods Sold

To deduct business expenses as supplies in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Business"” tab
2. Next click on “I’ll choose what I work on” (jump to full list)
3. Scroll down the screen until to come to the section “Business Income and Expense”
4. Choose “Profit or Loss from Business ” and select start/revisit/update.
5. If your business is already listed, choose to "edit"
6. You will get to a screen titled "Your () Business"
7. Under Business Expenses, choose "Other Common Business Expenses"
8. You can choose to report these costs under supplies or other miscellaneous expenses with the title "materials and supplies"