How to enter material and supplies that are not kept track of?

[Bpex]

I have a small business using the Cash basis of accounting. I do not keep track of my inventory, rather just buy it in bulk and use for many jobs until I need to purchase more. How would I enter what shows up as "cost of goods" in my P&L? I would put it in Other Common Business Expenses> Supplies, but the purchases can equal thousands of material to make my final product (rain gutters). The Inventory/Cost of Goods Sold category says to use it only if you keep track of inventory.

Windows TT Home & Biz

[MinhT1 · Accepted solution]

You do not need to keep track of your inventory for each job. To calculate Cost of Goods Sold, you enter your materials as Purchases.

You need to count and value your inventory at cost at the beginning of the year and again at the end of the year.

The formula for Cost of Goods Sold (COGS) is:

Beginning Inventory + Purchases - Ending Inventory

[Bpex]

Can I just say I have $0 worth to start with and $0 to end with even though I still have some? Then just input the total cost of goods each year somewhere? It would be near impossible to calculate the cost of inventory I have left.

[DawnC · Accepted solution]

Yes, you can enter $0 for beginning and ending inventory - and then you can use the Materials and Supplies line to enter your COGS expense.   Keep detailed records of your materials and supplies purchases.  

[Bpex]

So last year, I put my total "parts and materials" purchases under "material or supply expenses" as instructed. This year, Turbotax instructs "If you're not reporting inventory, but had material or supply expenses, enter them as supplies under expenses"
I did as TT suggests, so now their is a large disparity when I compare last year's "material or supply expenses" to this year's ($0) and this year my "supplies" is much higher than last year. I'm sure that is fine, but I just wan to be sure I am NOW doing what is correct?

[DianeW777]

Yes, the entry is correct because you are not required to maintain an 'inventory' figure since the passing of the Tax Cuts and jobs Act (TCJA) unless the income is over $25 million.

According to TCJA, businesses with gross receipts below $25 million are considered eligible to use the cash method of accounting for their inventory.  

• TCJA Comparison for Businesses: The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017. 
• Revenue Procedure 2018-40 provides further details.
  • (1) Description of change. This change applies to a small business taxpayer, as defined in section 15.18(5)(a) of this revenue procedure, that wants to change its § 471 method of accounting for inventory items to one of the following:
    • (a) treating inventory as non-incidental materials and supplies under § 1.162- 3; OR or
    • (b) conforming to the taxpayer’s method of accounting reflected in its applicable financial statements, as defined in § 451(b)(3), with respect to the taxable year, or if the taxpayer does not have an applicable financial statement for the taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

The choice is yours. For this reason you can list your inventory as materials and supplies each year without carrying an ending inventory amount as long as you meet the gross receipts qualifier.  Under the revenue procedure, the gross receipts threshold in IRC Section 448(c) increases from $26 million for taxable years beginning in 2021 to $27 million for taxable years beginning in 2022.

@Bpex 

[Bpex]

Yes, I am doing the cash method of accounting and not keeping track of inventory. My question was do I put all my parts and material purchases under Inventory>Material Or Supply Expenses" as instructed in this thread last year? Or into Business Expenses>Supplies? I think Turbotax is instructing to do so with this sentence: "If you're not reporting inventory, but had material or supply expenses, enter them as supplies under expenses".

I assume I should put them in Business Expenses>Supplies this year, but will it be an issue that last year I put them into Inventory>Material Or Supply Expenses? IRS is getting the same amount either way so I'm guessing it's fine.

[PaulaM · Accepted solution]

You'll need to 'dispose' of your ending 2022 inventory (2023 beginning inventory) if the the amounts carried over from the prior year. Yes, you can expense as supplies if not using inventory. 

[Bpex]

Thanks. My "Inventory" started and ended at $0 last year, but I put it all into "Material Or Supply Expenses" in the same TurboTax section. So it autofilled $0 as starting inventory this year.
I will now put it all in "supplies" in the "expenses" section.