TurboTax adds the difference in my inventory value from 1/1 to 12/31 into my COGS. My COGS should only be the amount I spent to create my product. Why is it doing that?

[Lisa995]

Not if you keep an inventory.  Are you truly keeping an inventory?  You buy or create things and hold them for sale at a later date?

[tomturiano]

Yes, I am a publisher. I have a garage full of books that I sell. In the Income&Expenses>Inventory section, I have entered my beginning 2018 inventory as 38,635, and my end 2018 inventory as 31,615. A difference of 7020. Then, on the next screen, I entered 7495 as my Cost of Purchases. Then on the next screen, it says that COGS is 14,515. COGS should not include the 7020. Why would the difference between the value of my inventory have anything to do with COGS?

[tomturiano]

Turbo Tax added the difference in my inventory value to my Cost of Purchases. I don't understand why it would do that. The difference in inventory value is not a cost. It is just the difference in the value of what I have my garage. In other words, I sold 7020 worth of product. That is not COGS.

[tomturiano]

Whoa. Wait a minute. I suppose the 7020 does represent the cost of what I sold. But then what is Cost of Purchases? I keep track of what it costs to produce each book (design, printing, etc), then I multiply that by the number of books I sell, then I entered that under Cost of Purchases. So, it seems I have been entering the cost for those sold books twice. So confused.

[Lisa995]

@Critter#2  or @Opus 17   you are both better at explaining this than I am, can you assist?

[Anonymous · Accepted solution]

here's the problem.  you been handling these costs as an accountant advised you.  I think he/she was wrong.  However, the IRS doesn't just let you change accounting methods without notifying them by filing form 3115.   this is not an easy thing to handle so you would probably need the help of a professional.  the way I think the costs should have been handled even though the books won't be produced until a future year, if ever, would be to add these costs to you year end inventory amount.   then if you produce the books, you allocate these costs to them so you expense the design costs as the books are sold.   if you decide not to produce the books, in the year you make the decision, you write off these costs.   

if audited, the  IRS could look at how your handling these costs and decide its wrong or not even look at this,  Even if they decide it's wrong, they could decide its not worth it to make you change.  

you have 4 choices

1) continue using the method you have been using realizing that the IRS could change your method 

2) change without filing 3115. not really advisable. the tax consequences of the IRS possibly disallowing the change or using a different method then what I think is proper could result in additional taxes, penalties and interest 

3) change the 2018 return to use the new method and prepare the 3115 yourself (see 4 for what needs to be changed and rad the instructions for the form).   if you mess up, the IRS could deny the change requiring you to amned the return back to the old method. if you owe there will also be penalties and interest 

4) change using a professional.  expIain to him what you are currently doing with regard to these costs (don't mention what I suggest) and ask him if he sees a problem and recommends changing. if he does, then get a quote since doing all the work necessary including  preparing the form could be time consuming (costly).  two things would need to be changed. the amortization of past costs  and recomputing inventory using the new method.    

[Anonymous]

cost of goods sold is supposed to represent your cost of the books sold. 

"I keep track of what it costs to produce each book (design, printing, etc), then I multiply that by the number of books I sell"  I'm assuming what you're saying is that if you produce some books for $4 and some for $12 you compute the cost of sales by multiplying the number of $4 books sold by $4 and the number of $12 books sold by $12. 

so Beginning inventory 

+ cost of production of books for the year

- cost of books sold during the year

= ending inventory

so if beginning inventory is $38,635 and current year production costs were $7,495 your inventory before any sales would be $46,130.   if you properly valued the ending inventory at $31,615  that means you disposed of inventory having a cost of $14,515 which is the cost of goods sold. 

[tomturiano]

Thanks for clear reply and help!

[tomturiano]

Yes, you assumed correctly. I produce some books for $4 and some for $12. I compute the cost of books sold by multiplying the number of each sold each year by the unique cost to produce each.

[tomturiano]

The 7495 was the actual cost of the books that I sold.

[tomturiano]

But, I did not spend the 7495 in 2018...

[tomturiano]

As mentioned above, the 7495 represents the cost of the books sold. The 7495 was spent in years past as I was creating the books.

[tomturiano]

I'm answering in small bits because I keep getting banned from the forum and losing everything I type.

[tomturiano]

So, should I not be claiming the 7495 as a Cost of Purchases? (since it was money spent in past years)