Question Regarding Inventory Based Business and Gross/Net Revenue

[esova12]

Dear Turbotax Community,

I set up an online business that is essentially a glorified garage sale of sorts. We are a bit stumped as to how to enter our inventory correctly and ask for the community's help. We had purchased hundreds of new and mostly used computer parts for our in person business and these parts needed to be sold and liquidated as they were older parts and not needed, but still had value. Essentially we sold everything (700+ ebay sales transaction) at break even, or in some cases below just to recoup our money. We haven't used turbotax before and when we are trying to complete our taxes using the free version and entering our business information, we are having trouble with getting the net vs gross income part correct. 

Exact inputs we are entering for business income in turbotax program:

Accural method

We play an active role in the business

No I don't have 1099 or 1099-MISC

"Income or Sales": $24,xxx

My business carries an inventory

Cost Method

Beginning inventory: 24,xxx

End inventory: 0.00

Cost of purchases: 23,5xx

Yes, qualified business income

What it is showing on screen after these inputs: 

Gross Income:  -23,500

Net Income: -23,500

What we should be seeing based on the circumstances: gross revenue of about 24k and a low to negative net income. 

What we are seeing: Negative gross AND net income, which is obviously incorrect. 

Any help is greatly appreciated!

[KathrynG3]

Upgrading to TurboTax Self Employed will be needed to report all the income and expenses. 

Since this is the first year of operations, the beginning inventory should be 0. Instead, put the $23,500 as Purchases or Cost of Purchases and do not include anything else in inventory if you no longer have inventory.

This is because of an interaction between financial statements for a business.

In a nutshell, the Balance Sheet keeps track of what you own, less what you owe, to calculate what you are worth. In contrast, the Income Statement captures all the earnings for one year les all the expenses for that year to result in a net income that is then taxed.

Inventory is stored on the balance sheet because it still is what you own. Only the cost of goods actually sold is brought over to the Income Statement and is subtracted from Revenue.

The formula is:

Beginning Inventory

Plus Purchases or Cost of Purchases

Less Ending Inventory

Equals Cost of Goods Sold

What has happened is:

24,000 for Gross Revenue

24,000 + 23,500 - 0 = 47,500 for Cost of Goods Sold. 

-23,500 for Net Loss

Click here for more details: Tax Guide for the Self-Employed: Everything You Need to Know

[esova12]

Hi KathrynG3, 

I appreciate the reply but I am still having an issue with this and would appreciate further assistance getting this correct from you and the rest of the community. I left out something from my initial post after re-reading it. I am using the TurboTax "Amend" software for 2019 taxes if it makes any difference. I did what you said and left the inventory beginning and end $0. 

I am entering 24,xxx as "Income or Sales". I am leaving everything else above the same except I am leaving both beginning and ending inventory fields $0 as you said. For "Cost of Purchases" I am entering 23,5xx. Only two inputs for dollar amounts overall. What it is giving me under "Business Summary" is $500 for "Gross Income" AND $500 for "Net Income", which is incorrect. These numbers need to be different, but they are showing the same. The net in this instance is correct, but the gross is not showing $24,xxx as I am entering it. How do I correct this?

From the format above, this is what I am entering:

Exact inputs we are entering for business income in turbotax program after the adjustments from your post:

Accural method

We play an active role in the business

No I don't have 1099 or 1099-MISC

"Income or Sales": $24,xxx

My business carries an inventory

Cost Method

Beginning inventory: 0.00

End inventory: 0.00

Cost of purchases: 23,5xx

Yes, qualified business income

What it is showing on screen after these inputs: 

Gross Income:  500

Net Income: 500

What it should be showing:

Gross Income:  24,xxx

Net Income: 500

I know this is likely a very simple thing to solve for some of the experienced turbotax experts on this site and would greatly appreciate any help.

Thanks in advance!

[KathrynG3 · Accepted solution]

Nothing needs to be updated. I ran a test and also have the net income listed as the gross income. Being in 2019 does not change the reporting, but using the CD/Download means you can toggle to the forms!

To confirm that the gross income is being reported in full on Schedule C, follow these steps:

• Toggle to Forms in the top right hand corner by clicking on the Forms icon.
• From the left menu, Forms in My Return, scroll down to Schedule C and click to open it.
• Check Part I: Income in line 1a to determine if the gross amount is being reported as expected. 
  • Since the net income is correct, it will be reported as expected to the IRS even though the Summary appears to report that the gross income equals the net income incorrectly.

A few things to review:

1. Ending Inventory: Since you are amending a prior year return, please review these scenarios:

• if you sell other things besides the camera parts and had them on hand on December 31, 2019, then include that value in ending inventory. For 2020 reporting, the ending inventory from 2019 should be entered as beginning inventory for 2020. 
• if you sell other things but did not have anything on hand, continue with the plan of reporting these categories at -0-.

2. See: What is the accrual method of accounting? for more information. If you change from what has been reported to the IRS, an additional form must be included, called Form 3115, change in accounting method.

@esova12