I see that others before me are probably not providing the clarity that you need. So let me give it a try. Now I know about business assets, as well as inventory. I'm not to sure about good will though.
If the business you purchased included physical assets that are used for the production of income, those assets are listed in the Business Assets section with the cost basis of each asset being what you paid for that asset. Then it will be depreciated over time, with the depreciation time depending on the classification of the asset. Now I assume you already know this and I'm just stating it for clarity is all.
Good will, I don't know how to handle that. It may be something that gets amortized (not depreciated) over time - presumably 15 years for all I know.
Now for the inventory, I know this. There are IRS rules on this. First, some clarification of terminology.
- Beginning of Year (BOY) inventory - What "you" paid for the inventory in your physical possession on Jan 1 of the tax year.
- End of Year (EOY) Inventory - What "you" paid for the inventory in your physical possession on Dec 31 of the tax year.
- Cost of Goods Sold (COGS) - What "you" paid for the inventory you actually sold during the tax year. This figure is one (of many) that are subtracted from the business gross income for the tax year, to determine your taxable profit or loss for the year.
The BOY Inventory balance must match the prior year's EOY inventory balance. There are no exceptions. Since you did not have the business in 2020, then your 2021 BOY Inventory balance "MUST" be zero. Again, no exceptions.
Then you EOY inventory balance for 2021 will be what you paid for the inventory you haven't sold, (and presumably still in your posession) on Dec 31 of 2021.
NOw here's a possible scenario for how this could look for your first two years of business.
Year 1
BOY Inventory Balance - $0 (must be zero, since last year you didn't even have this business.)
COGS - $283
EOY Inventory Balance - $21,000
For year one, the above shows that you started the year with no inventory and during the year you paid $21,283 for your inventory. Of that, you sold $283 of that inventory leaving you with a balance of $21,000 of inventory at the end of 2021.
Year 2
BOY Inventory - $21,000 This matches exactly the prior year's EOY inventory amount. If it doesn't, then you've got some 'splainin' to do to the IRS, and there isn't a reason on the planet they will accept.
COGS - $5000 - This is what you paid for the inventory you sold in 2022.
EOY Inventory - $19,000 This is what you paid for the inventory in your possession on Dec 31 of 2022.
The above indicates that you started the tax year with $21,000. Then during the year you purchased an additional $3000 of inventory bringing your inventory balance to $24,000. During the same tax year you sold $5000 of that inventory leaving you with an EOY balance of $19,000
Do note that in the above examples I do not include things like inventory removed for personal use, in order to keep this simplified. But the program will ask for that so as to account for everything when it comes to inventory.
