COGS can be confusing - especially if one over thinks it. I'll do my best to help you understand. Basically, when you purchase inventory, you can not deduct what *you* paid for that inventory, until the tax year you sell that inventory. Period. Also, the End of Year (EOY) inventory balance must match the next year's Beginning of Year (BOY) inventory. If it doesn't, then you must explain to the IRS why it does not. So here's a few examples, followed by explanations.
BOY Inventory: $5000
Cost of Goods Sold $1000 (What *YOU* paid for the inventory)
EOY Inventory $4000
The above indicates that I sold $1000 worth of my inventory in the tax year. The $1000 is what "I" paid for the inventory, it is NOT what I sold it for. Note that it flat out does not matter in what year I purchased that inventory either. I could have purchased it 10 years ago. But I can only deduct from the current tax year's income, the cost of what I actually sold in that tax year.
BOY Inventory $5000
Cost of Goods Sold $1000
EOY Inventory: $9000
The above indicates that I started the year with $5000 in inventory. It also shows that I sold $1000 of that inventory, and in that same tax year I purchased an additional $5000 of inventory leaving me a total of $9000 of inventory left at the end of the year.
