I signed on as a Stampin' Up! Demonstrator in 2021. As a direct sales business, I do not have to keep inventory on hand as it is not purchased directly from me. However, I need to keep products on hand to use for demonstrations (card classes, online videos, etc). I am trying to figure out how I categorize my stamp and die set expenses properly. Do I record them as inventory? Are they a capital expense? Materials and supplies expense? I have no intention of ever selling them. They are not consumable. However, they are a necessary business expense in order to sell my products. Therefore, I believe they absolutely fall into the category of COGS, but the "inventory" part is what's confusing me. If I classify and track them as inventory, the only way that they can come off of my books is if the products go end-of-life from the parent company - correct? i.e. a stamp set that was available for sale in 2021, which I purchased was classified as an inventory expense in 2021. Then it went EOL in 2022, so for 2022 tax purposes it will come off of my inventory... am I tracking this logic correctly? Any help/advice/direction would be greatly appreciated.
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@tmmw3398 wrote:
Do I record them as inventory? Are they a capital expense? Materials and supplies expense?
The products may be assets that should be capitalized or, possibly, deducted as a materials and supplies expense, but they are not inventory.
Inventory is merchandise held to be sold in the ordinary course of business (hopefully, for a profit).
@Anonymous_ Thank you for the feedback! After further research I found this in IRS Pub. 946 (2021) section titled "Property Used in Business or Income Producing Activity": "Inventory. You cannot depreciate inventory because it is not held for use in your business. Inventory is any property you hold primarily for sale to customers in the ordinary course of your business."
After reading that, I felt assured that what I have for my demonstrator business is NOT inventory. However, I was just filling out my Schedule C, in Part 3 I got confused again... basically since this is my first year of business, I had $0 for all items other than line 38 "Materials & Supplies" which is where I categorized all of my business expenses (described in first post) that were not applicable to Section 2. For line 41, I am correct in saying $0 and in line 42 it only have the cost of Materials & Supplies... right?
While you have ruled out that these items are not inventory, you haven't ruled out that they are not assets. How much did the items cost? Will they last more than a year? If they are assets, they need to be depreciated and they are not supplies.
There is another option.
When you purchase items for your business, you can either deduct the full cost of the expense at once, or you can deduct the cost over multiple years (depreciation).
The De Minimis Safe Harbor election lets you deduct the full cost of items worth $2,500 or less, instead of depreciating. You can also use the Safe Harbor Election for Small Taxpayers to expense the cost of improvements to business buildings if you qualify.
These elections are available for Schedule C businesses, rentals, farms, and farm rentals.
For instructions on claiming the De Minimis Safe Harbor Election in TurboTax, select your product:
Why would I want to take these elections?
These elections let you deduct your items as expenses instead of depreciating them over the life of the item. One-time expenses typically reduce your income by a larger amount than depreciating an asset over multiple years. This means you could get a bigger refund.
If you take these elections, they will apply to all your businesses, rental properties, or farms.
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