The COGS secytion does not work the way you seem to think it does. I'm basing this on the wording of your post. First, some terminology.
- BOY (Beginning Of Year) Inventory balance - This is what "YOU" Paid for the inventory in your physical posession on Jan 1 on the tax year. It flat out does not matter when you purchased that inventory either. YOu could have purchased it 50 years ago. In your first year of business *OR* your first year of dealing with inventory, your BOY Inventory balance ***MUST*** be zero. That's because your BOY balance must be the exact same is your previous year EOY (End of Year) Inventory balance. If it's not, then you've got some 'splainin' to do to the IRS, and they will not accept your explanation for the difference.
So for that first year your BOY inventory "MUST" be zero, since there's no question the business had no inventory on Dec 31 of the prior year since either the business did not exist, or the business did not report inventory in that prior year.
- EOY (End of Year) Inventory balance - What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year. Again, it does not matter in what tax year it was purchased.
- COGS (Cost of Goods Sold) - What *YOU* paid for the inventory you actually sold in the tax year. Again, it does not matter in what tax year it was purchased.
Now of few examples:
BOY Inventory - $0 (what "I" paid for the inventory in my physical possession on Jan 1 of the tax year. This does "NOT" mean that I have no inventory. But if I do have inventory it means that I got it for free.)
EOY Inventory - $5000 (This shows that I ended the year with $5000 of inventory still in my possession and not sold.)
COGS - $1000 (This shows that I sold inventory during the tax year that "I" Paid $1000 for.
So the above indicates that I started the tax year with no inventory, I purchased a total of $6000 of inventory during the tax year, then sold $1000 of that inventory leaving me with $5000 of inventory at the end of the year.
BOY Inventory - $5000 (note this matches "EXACTLY" my prior year's EOY balance. )
EOY Inventory - $4000
COGS - $10,000
The above shows that I started the tax year with $5000 of inventory, purchased an additional $9000 of inventory and sold $10,000 of inventory leaving me with $4000 of inventory at the end of the year.
Now it's the COGS amount that gets deducted from your gross business income. You can't deduct what you pay for inventory until the tax year you actually sell that inventory. Again, it does not matter in what tax year you purchased and paid for that inventory either.
