Apparently, you aren't fully cognizant on how inventory works. That's understandable becuase the IRS wording in the publications that cover this (and there are many) aren' exactly what I would call "reader friendly". So I'll do my best to make it reader friendly for you, with a few examples.
- First, understand that what you pay for inventory is not a deductible expense until you sell that inventory. It *DOES* *NOT* *MATTER* if you purchased that inventory 10 years before you opened your business either.
- Your Beginning of Year (BOY) inventory balance is what *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year. In your first year of business, or in the first year your business starts dealing with inventory, your BOY Inventory Balance *MUST* *BE* *ZERO*! There are no exceptions.
- Your End of Year (EOY) inventory balance is what *YOU* paid for the inventory in your physically possession on Dec 31 of the tax year. Additionally, your BOY inventory for a tax year *MUST* match exactly your EOY inventory balance for the prior year. This is why in your first year of business or dealing with inventory, your BOY balance has to be zero. If your business did not exist on Dec 31 of 2018 or did not report inventory on that date, then your Jan 1 2019 inventory balance *MUST* be zero. There are no exceptions to this.
Now a few examples starting with by first year of business.
I have inventory to sell that I purchased back in 2016. I paid $4000 for that inventory when I purchased it in 2016. My business opened in 2018. So in the COGS section (COGS=Cost of Goods Sold) I have this data entered.
BOY Inventory Balance (What *YOU* paid for the inventory i your possession on Jan 1, 2018. = $0
Note that the above BOY balance *MUST* match my prior year EOY balance. Since I did not report inventory in the prior tax years, my BOY balance for 2018 *MUST* be ZERO so that it matches exactly my 2018 EOY balance.)
Tax year 2018:
COGS (what *YOU* paid for the inventory actually sold) $3000
EOY Inventory Balance - $1000
The above shows that I started the year with $0 inventory. Then I purchased $4000 of inventory (what year I purchased it is irelevant) and sold $3000 of that inventory I purchased in 2016. That leaves me with an inventory balance of $1000 on Dec 31 of 2018.
Tax year 2019:
BOY Inventory Balance $1000 (matches "exactly" my prior year EOY balance.)
COGS = $5000
EOY Inventory Balance $4000
The above shows that in 2019 I had $1000 of inventory in my possession on Jan 1 of 2019. It further shows that I purchased an addtional $8000 of inventory in 2019, bringing my total inventory to $9000 for the 2019 tax year. Then during that same year I sold $5000 worth of inventory leaving me with an EOY Inventory Balance of $4000 on Dec 31 of 2019.
Take note that I can only deduct from my taxable business income for 2018, the $3000 I paid for the inventory I actually sold in 2019.
For 2019, I can deduct from my taxable business income the $5000 worth of inventory I actually sold in 2019.
One reason for this type of setup is because you also have options to remove inventory for "personal use". What you paid for inventory that was removed for personal use is not deductible.
You may also have inventory that you might give away as a sales promotion. For example, buy one get one free. In cases such as that, you just include the "freebie" giveaway in your COGS total.
Hopefully I"ve been able to help you understand how COGS works now.
