Resale business Inventory

[timmaggie]

I started my resale business in 2018.  On my return, which I completed with Turbo Tax, it shows a blank answer on my BOY and EOY inventory.  During 2018, I paid for all of the inventory I purchased with my sales but I still had inventory remaining.   What do I enter for my 2019 BOY inventory?  Is $0 correct since the inventory is paid for?  Do I need to amend my 2018 return?

How do I calculate EOY for 2019 since all inventory has been paid for as well.

Thank you

[LudwigVan_fan]

Generally, even though you "paid" for your inventory, you can't deduct the cost of year-end inventory until it's sold.  For 2018, the beginning year of your business, opening inventory would be $0.  However, you should have reported EOY inventory...thus reducing your COS for 2018.  BOY for 2019 would be the same number as the EOY for 2018.

Changing the way you do it for 2019 from 2018, would be a change in accounting method.  I would suggest amending 2018 to reflect the inventory you had on hand at the end of 2018.  Then enter that number as BOY inventory for 2019.  Also, you should have the EOY inventory for 2019.

General Formula:

BOY Inventory                 $xx,xxx

Purchases                           xx,xxx

Available goods             -----------

   for sale                          $ xx,xxx

less:

EOY inventory              ($xx,xxx)

                                        --------------

COS                             $xx,xxxx

For more guidance, please review IRS Publication 334, Tax Guide for Small Business

https://www.irs.gov/pub/irs-pdf/p334.pdf

There are different methods of valuing ending inventory.  Common methods are cost, cost or market, whichever is lower, LIFO (Last in First Out a detailed method), retail method, etc.

If you meet the small business exception, you don't have to inventory per se.  BUT, you must then treat the inventory as non-incidental material or supplies.  Which still means you can't deduct the goods until they are basically sold or consumed.  Page 15 of Pub 334.

[timmaggie]

I do qualify as a small business taxpayer, do I still have to amend 2018 return to include EOY inventory?  

[LudwigVan_fan]

I think you need to amend 2018; to either use the inventory method OR to set up account(s) for purchased but unsold inventory....like a prepaid expense account.

Basically when having items for sale/resale, you can't expense items before they're sold.  The unsold goods are basically non-incidental material or supplies and have to be accounted for as such.  In either way of accounting for them, you have to reduce the 2018 COS for the unsold items and either account for them as ending inventory or a balance amount in a prepaid materials/supplies.

[Rick19744]

What is the volume of your business?

Under $1 mil?

Under $26 mil?

On your resold products, do you add any value to the product prior to selling?  Just trying to understand the type of business.

Also what method of accounting did you mark on your 2018 tax return?

[timmaggie]

Hello,

Business is under 1 mil.  I used cash method in 2018.  I do not add to the value of items before reselling. 

Thank you