Get your taxes done using TurboTax

BOY - Beginning of Year Inventory Balance. What *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year.

COGS - Cost of goods sold. What *YOU* paid for the inventory you actually sold during the tax year.

EOY - End of Year Inventory Balance. What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year.

The BOY Inventory balance *MUST* match *exactly* the EOY Inventory Balance of the prior year. If it does not, then you have some explaining to do to the IRS. There is *no* explanation that is acceptable to the IRS either. So they MUST match, with no exceptions.

In your first year of business, or in the first year your business deals with inventory, your BOY Inventory Balance *must* be ZERO. There is no other possible way for it to match the prior year's EOY Inventory balance, since you did not report "any" inventory at the end of the prior year. It flat out does not matter if you purchased inventory 50 years ago either. The BOY balance in that first year "must" be ZERO. No exceptions.

Here's a few examples showing how this works for the first two years.

BOY Inventory Balance - $0 : What "you" paid for the inventory in your physical possession on Jan 1 of the tax year. It does not matter in what year the inventory was purchased either. Being the first year the business is dealing with inventory, the BOY balance *must* be ZERO. No exceptions.

COGS (Cost of Goods Sold) - $5000. What *YOU* paid for the inventory actually sold during the tax year.

EOY Inventory Balance - $2000. What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year.

The above shows that I started with $0 inventory and that amount matches the prior year EOY balance, since my business did not exist or report any inventory at the end of the prior year. I then sold $5000 of that inventory during the tax year, and that $5000 amount will be subtracted from my *taxable* business income, thus reducing the taxes I pay on that business income. At the end of the year I still have $2000 of inventory in my physical possession.

Do the math shows that during that year I had and/or purchased a total of $7000 of inventory, sold $5000 of that inventory leaving me with $2000 of inventory in my possession on Dec 31 of the tax year.

BOY Inventory Balance $2000 - What *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year. Take special note that this matches "EXACTLY" what my EOY balance was the previous tax year. It does not matter in what tax year this inventory was purchased.

COGS - Cost of Goods Sold $7000 - What *YOU* Paid for the inventory actually sold during the tax year. It does not matter in what tax year you paid for this inventory.

EOY Inventory Balance - $1000 - What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year. It does not matter in what tax year you paid for the inventory.

The above shows that on Jan 1 of the tax year I had $2000 of inventory in my physical possession. Then I sold $7000 of inventory during the tax year, ending the tax year with $1000 of inventory in my physical possession.

Doing the match shows that I purchased an additional $6000 of inventory during the tax year bringing the total inventory purchased to $8000. Of that total I sold $7000 of inventory leaving me with an EOY balance of $1000.

With the above examples you should now understand that what *YOU* paid for inventory is only deductible in the tax year you actually sell that inventory. It does not matter in what tax year you may have purchased it.  This actually makes it simpler and easier to account for non-sales reductions in inventory. For example, as you work through the COGS section of the program you'll see an option where you can report inventory that was removed for personal use. What you paid for personal use inventory is not deductible. But it does reduce your inventory balance so that your EOY balance will correctly agree with the next year's BOY balance.

There's also the allowance for loss of inventory such as spoilage (if your inventory is food items) that will reduce your inventory balances without taxing that which you paid for the now-spoiled, damaged, stolen or otherwise lost inventory item.