Can I use the cash method of accounting?

[avigo45]

I have a quantity of items I bought in 2017 then I ended up not needing. I sold some of them during the 2017 year and made a profit. 

This is not an official business or anything, but I am making a profit from selling these items and I do plan to sell some other things moving forward (more as a hobby, I still have a full time job)

I'd prefer to use the cash method of accounting and just note how much I bought them for, my expenses, and my profit as opposed to using inventories.

Is it ok/legal for me to use the cash method of accounting in this situation?

Thank you. I just want to make sure 100% before I move forward.

[Coleen3]

Yes, you can use the cash method and not bother with inventory.

If you use cash method and your total average income for the last 3 years was less than $1,000,000 per year, you don't need to use the cost of goods sold section at all.

Instead, you can just write off your merchandise under supplies or miscellaneous expenses when you purchase it. In this case, your merchandise purchase in 2017 would be fully written off then as a business expense. Your 2018 is written off in 2018.

Most taxpayers are cash basis taxpayers.

Under the cash basis method you include income you actually or constructively receive during the year and deduct expenses for your business in the year you actually pay them.

In accrual accounting, you report income in the tax year that you earned it, even if you don't collect payment until the following year. The accrual method of accounting is often used by larger businesses that carry inventory or offer credit.

This also applies with expenses. Under accrual accounting you deduct expenses when you incur them. Let's say you received office supplies in 2017 but didn't pay for them until 2017. You'd deduct the expenses in 2017, the year you were able to start using the supplies.

[avigo45]

Hi, thank you for the answer! I'm confused, are you saying that I shouldn't use a schedule C and the cash method of accounting? (my cost of goods sold minus purchase price to get profit)?

[Coleen3]

I'm saying you are not required to keep an inventory. You would enter your income and expenses on Schedule C if you have a profit motive.

Business or Hobby? Answer Has Implications for Deductions

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.
In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:
• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity

[avigo45]

Thanks again! So if I wanted to move forward calling this a "business" I would use a schedule C and use the "cash method"? Just wondering if cost of goods sold is considered an expense or not. I appreciate all the help

[Coleen3]

Yes you would. COGS is not an "expense" however, it does reduce your profit. Look at the form. It is only Line 4 and is counted against Gross receipts to arrive at Gross Income. <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f1040sc.pdf">https://www.irs.gov/pub/irs-pdf/f1040sc.pdf</a>

[grantbt]

Thanks for this info.  I'm in the same boat. I build small electronic kits by hand and sell on eBay. I fill in the categories for income, supplies, expenses, etc and I choose NO for the Do You Have Inventory question.  This is what I am hoping to be able to do.

It never asks me COGS!  Is that an internal calculation done for me??  I'm also hoping to choose cash and no inventory. It's not big time stuff, just income on the side (meets the criteria elsewhere on this page).

So, maybe to restate, it's OK to choose NO for the inventory question?  Or do I have to choose yes and can get away with 0 inventory at the beginning and end of the year?

[Coleen3]

COGS and inventory are the same thing. Since you are replying, "no", it will not take you there. You are doing correctly. Just enter in your expenses.

[grantbt]

Thank you.

[grantbt]

Thank you.

[Coleen3]

My pleasure.

[fanfare]

COGS and inventory are certainly not the same thing.

COGS offsets items you sold during the year. (hence the name). Inventory is items available on your shelf but not yet sold

[grantbt]

We are just talking about how they are located in TurboTax. Sorry for the confusion.

[avigo45]

So maybe I missed it, but if we are using the cash method, where do input the cost of goods sold? I'm assuming as some kind of expense, but what kind, and where?

[grantbt]

If you are not counting inventory then you can put the things you bought in one of the Expense categories.