topic Form 8858 question about Schedule H additions/subtractions-–inventory? in Business & farm

Form 8858 question about Schedule H additions/subtractions-–inventory?

Gordo5 — Wed, 11 Dec 2024 17:04:48 GMT

I am trying to fill form 8858 for my FDE. I don't understand Schedule H Lines 2 and 3 "additions and subtractions". Instructions say “Inventory adjustments. Inventories must be taken into account according to the rules of sections 471 (incorporating the provisions of section 263A) and 472 and the related regulations.”

So if I bought some inventory to sell during the tax year, but didn’t sell any of it yet, do I have to report the cost of the inventory in 8858 Schedule H?

Is it an addition or a subtraction?

If it’s an addition, Schedule H is counting my unsold inventory as income? Isn’t that going to conflict with my 1040 where I don’t report my inventory as income?

I’m not taking any expense deduction for the inventory because it’s supposed to be reported as part of Cost of Goods Sold in the year when it is sold.

Thanks very much for any help.

Re: Form 8858 question about Schedule H additions/subtractions-–inventory?

pk — Wed, 11 Dec 2024 18:29:56 GMT

@Gordo5 please tell me a little bit more about your business model ---- from your post it sounds more like a schedule business buying inventory from a foreign source ( a-la domestic ) and then selling the material ( with or without modification/ enhancement) to on-line customers. So I am confused about the FDE angler here. Or is this a foreign partnership ( at least some foreign partners) ?

Please help me understand before we start delving into the intricacies of section 6011/6012 / 6031 and 6038 etc.

I will circle back once I hear from you --yes ?

Re: Form 8858 question about Schedule H additions/subtractions-–inventory?

Gordo5 — Wed, 11 Dec 2024 18:52:51 GMT

Thanks so much for the reply, pk. My biz is just a simple foreign disregarded entity. No partnerships, no corporations, not a CFC, not a QBU. It’s comparable to a sole-proprietorship in the US, but with much more difficult forms to fill. I live in the country where the biz is operating.

I bought these products in the country where I live to package and resell in the same country. I didn't make them myself, I'm just going to market them. I bought them in 2023 and did not sell any of them in 2023. (I'm filing a year 2023 8858--I have an extension).

So I thought the cost of the goods is not deducted until I sell them as COGS. If I had to add the cost to my 8858 Schedule H taxable income (or loss), IRS would assume this was income and it’s not. Unless it's a subtraction, not an addition. I don't know how to classify it.

So I just need clarification about what they mean when they say “Inventories must be taken into account according to the rules of sections 471 (incorporating the provisions of section 263A) and 472 and the related regulations.”

It’s vague wording. “Inventories must be taken into account.” Okay, but should they be reported on Schedule H, in this circumstance?

Thanks again for your help.

Re: Form 8858 question about Schedule H additions/subtractions-–inventory?

pk — Thu, 12 Dec 2024 17:49:51 GMT

@Gordo5 , I am lost as to why you are considering your entity / sole proprietorship to be a Foreign Disregarded Entity. Generally, an FDE is a foreign entity that does business in the USA. Because they are not a US person / entity, how do you tax them. That is where FDE allows the partner/ branch in the USA to be taxed on US sourced income either as a Schedule-C or as C-Corp.

Your case is no different than a self-employed US person earning in a foreign land. Thus you use Schedule-C and COGS etc. to work out your net income to be taxed by the USA. You are also liable for SECA ( FICA times 2 ). Any taxes on income by the Foreign taxing authority may be eligible for Foreign Earned Income Exclusion or Foreign Tax Credit / deduction ( with SALT limits ).

Does this make sense ?

Is there more I can do for you ?

Re: Form 8858 question about Schedule H additions/subtractions-–inventory?

Gordo5 — Fri, 13 Dec 2024 10:55:13 GMT

Thanks for your reply, pk. My business is a one-person FDE. An FDE can be a foreign company operated in a foreign country by a US citizen. I selected FDE status on form 8832.

The question I need help with is on 8858 Schedule H. Form's instructions say that Inventory must be taken into account. I am asking how do I do that? My inventory was purchased in 2023 and none of it was sold in 2023. So do I have to enter something about this as an addition or subtraction in Schedule H? The 8858 instructions are very inadequate and no help at all.

Thanks, I hope I have clarified for you that it IS an FDE and I need help with one specific question about whether unsold inventory should be entered on 8858 Schedule H as an addition, a subtraction, or not entered at all?

Re: Form 8858 question about Schedule H additions/subtractions-–inventory?

pk — Sat, 14 Dec 2024 20:05:41 GMT

@Gordo5 , I am not going to convince you to follow the KISS principle ( of which I am firm believer and practitioner). Schedule-H is only being used as an adjunct to Schedule-C in recognizing adjustments to be made between Foreign Book keeping ( local rules ) and essentially GAAP preferred by IRS. Thus ,in my view ,if you have kept your books pretty much in line with US book keeping norms ( GAAP ) and have included your inventory position/ recognition as part of COGS on schedule-C ( page 2 of the form 8858 ) and followed inventory usage discipline/ methods under section 471, 472 ( and refs to sections 263 and 481 ), there would really be no inventory adjustments on Schedule-H.

Note that the ONLY reason a foreign entity / sole proprietorship comes under the purview of US Taxation is because the owner is a US person . Thus my advice would be to look at what you are trying to achieve -- pay taxes on your sole proprietorship income to the US ( as a US person ) and find the path of least resistance / most expeditious way.