1. My business operates on consignment (consignors give us products to sell in the shop, and we pay them once they sell), in addition to a small percentage of inventory being purchased wholesale. In order to calculate my "Beginning inventory" and "Ending inventory," do I include only the wholesale items?
Items you sell on consignment are not yours. They never were, are not now and never will be. At no time do you pay a purchase price for a consignment item. If the item sells, you keep your percentage of the sale price as business income and the original owner of the consignment item you sold gets the rest. If the consignment item does not sell, then the owner of that item just takes it back into their possession. So at no time do you have any ownership rights to a consignment item. Under no circumstances do you include it in the inventory COGS section for any reason.
I've read on an IRS document to exclude "items on consignment," but have read other conflicting things.
There is no conflict here. The IRS publication is the final authority, and the "only" authority. What others say (including me) hold absolutely no weight what-so-ever if it conflicts with what is contained in in IRS publication. The IRS publication is "the bible" on this stuff. No exceptions.
2. Seeing as this is the first year the business is in operation, the "Beginning inventory" is nearly zero,
No. It's not "nearly" zero. It "is" zero. For your first year of business or first year of deal with inventory, your BOY Inventory balance *MUST* be zero, and there are no exceptions. If flat out does not matter in what tax year you purchased or acquired that inventory either.
One reason for this is because your BOY Inventory balance absolutely must match exactly your prior year's EOY Inventory Balance. Since 2019 was your first year of business and the business did not even exist in 2018, there is no way possible that your business had an inventory balance greater than ZERO in 2018. So your 2019 BOY Inventory Balance has to be zero, with no exceptions.
For each tax year you deal with inventory, if your BOY Inventory balance doesn't match the prior year's EOY balance, you'll have some 'splainin' to do to the IRS, and there is no way possible you're going to "explain" that difference.
and the "Ending inventory" much higher, resulting in a negative number for Cost of Goods Sold (there aren't that many "Purchases" required for us to get the goods). This seems to ignore a large amount of inventory we obtained throughout the year, but sold (meaning it's not in either category). Would these items obtained in the middle of the year go under "Purchases"?
Apparently you don't understand how COGS works. Don't worry, it's not like you learn this stuff through osmosis and for a first timer it can't take a bit to wrap your head around it. In my opinion, the way the IRS requires you to report it on your taxes is what I refer to as "going around your elbow to get to your thumb". But once you understand it, it's simple. So here goes.
Understand that what you pay for inventory is not deductible until the tax year you sell it. Period. It does not matter if you purhcased that inventory 50 years ago. You can't deduct what you paid for it, until the tax year you actually sell it. Here's two examples, with example 1 showing the first year, and example 2 showing the 2nd hear.
BOY Inventory Balance = $0 This is what 'YOU" paid for the inventory in your physical possession on Jan 1 of the tax year. This amount *MUST* match your prior year's EOY balance. So if this is your first year dealing with inventory, the BOY balance must be zero with no exceptions, regardless of what tax year you actually purchased the inventory.
Cost of Goods Sold (COGS) - $5000 This is what *YOU* paid for the inventory that you actually sold in the tax year. It does not matter in what tax year you paid for this sold inventory either.
EOY Inventory Balance - $6000 This is what "YOU" paid for the inventory in your physical possession on Dec 31 of the tax year.
The above year 1 example indicates that you started the tax year with zero inventory. It also indicates that throughout the year you purchased a total of $11,000 in inventory. During the same tax year you sold $5000 of that inventory, leaving you with $6000 of inventory in your physical possession on Dec 31 of the tax year.
The $5000 of inventory you sold is the amount that will be deducted from your gross business income so you don't pay taxes on it.
Example #2 (2nd year of business)
BOY Inventory - $6000 Take special note that this matches exactly, the prior year's EOY inventory balance. It "must" match. No exceptions.
Cost of Goods Sold (COGS) - $3000
EOY Inventory - $12,000 This is what "you" paid for the inventory in your physical possession on Dec 31 of the 2nd tax year. Again, it doesn't matter in what year you purchased that inventory either.
The above indicates you started your 2nd year of business with$6000 of inventory. Then throughout the year you purchased an additional $9000 of inventory bringing your inventory total for the year to $$15,000. Then out of that $15,000 of inventory you sold $3000 of that inventory leaving you with an EOY Inventory balance of $12,000.
The $3000 of inventory you sold in this 2nd year will be deducted from your gross business income so you don't pay taxes on it.
I think the above should help you get things straight now. If not, just let me know where additional clarification may be needed.
