Loaned myself funds to purchase inventory

[madkiwis]

So my sole proprietorship business carries an inventory. This year I personally loaned the business money to buy inventory, as I have been faced with the problem of vendors needing to be paid up-front but with Covid issues having to wait months for my goods.

It is what it is- my problem is trying to figure out how that impacts my COGS for the year. My end of year inventory is going to be (as of this moment, could change) $100,000 higher than normal because of my situation. The business owes me $100,000 but the inventory valuation increase is going to translate to an extra $100,000 in earnings.

I don't want to have to pay taxes on $100,000 in phantom profits, so should I be deducting the balance of the inventory loans from my end of year inventory valuation?

This is from a guy who used to do corporate accounting...

Any help appreciated.

[tagteam · Accepted solution]

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@madkiwis wrote:

The business owes me $100,000 but the inventory valuation increase is going to translate to an extra $100,000 in earnings.

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As a sole proprietorship, you actually owe yourself the funds you lent to the business, but your inventory will increase by $100,000 (the $100,000 in inventory you buy will be entered in Part III of Schedule C as "Purchases").

As a result, there will be no translation into an extra $100,000 in profit unless and until you sell the inventory you purchased with the fund you invested in your business.

[VolvoGirl]

If you are filing your sole proprietor on Schedule C in your personal 1040 return it is a disregarded entity.   You and the business are the same.  It doesn't matter which "pocket" or account the money paid comes from.   Just enter it as normal expenses and purchases.

If you are a sole proprietor or self employed, you don't account for cash, money or loans you put into the business. The schedule C is all your personal income and expenses in the first place. Doesn't matter what account the money came out of. It is not income or an expense. You just enter the gross income you received and actual expenses you paid. If you paid for something you can take the expense. Doesn't matter how you paid it. You deduct the money you put in to the business by entering the expenses you used it for.

[madkiwis]

Oh snap!

That's right, the $100K I have given the business was spent on the expenses side to buy that inventory...

Clearly I need this 2nd cup of coffee.

Thanks!

[Critter-3]

Also be aware ... even if you put the money into the business account it is NOT  considered INCOME so do not enter it as such on the return.