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Business & farm
Hi Carl and thank you so much for taking the time to explain. I really appreciate it.
My situation matches Example 1. This is what I put in my tax for 2019:
BOY = 0
COGS = $150
EOY = $5,350
With this, I understand that with my 2019 filing I "told" the IRS that I purchased a total of $5,500 in inventory (non-deductible until sold) of which I sold $150 (which is the only deductible part) and I have $5,350 inventory on Dec 31.
Am I correct until this point?
Now for 2020, I did not purchase any new inventory.
BOY = $5,350... the same amount with which I ended 2019.
COGS = $350 - the cost of the 25 t-shirts which I sold in 2020 (regardless of the fact that I paid for them in 2019).
Therefore my EOY should be $5,350-$350=$5,000. Am I correct?
When I input it like this, the federal tax I owe jumps with $630, and the state tax jumps with $263. What I expect when I input it like this is to get a $350 deduction from the income ($600) and pay tax on my $250 profit. Am I correct? Can you help me with why this is happening?