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?