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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.
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.
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.
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