turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Can COGS (Line 42 on Schedule C) be a Negative Number?

My circumstances are a bit different which is why my COGS is different from the norm. I started a reselling business in 2021 so no manufacturing, labor, materials needed and also, the products were purchased by another person. I received instruction after explaining the situation to put my Purchases as 0 due to that.

 

So Lines 35-39 for Part 3 are all 0 but Line 41 for my End of Year Inventory is let's say, 500. Line 42 says to substract Line 41 from the sum of Lines 35-39 which would be a negative number.

 

I wanted to check if a negative number is allowed for Cost of Goods Sold because multiple tax filing sites I used set Line 42 & Line 4 as 0 (or left them blank) and I wanted to make sure this is correct to submit and not the software going a big wonky. Thank you!

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

5 Replies
ColeenD3
Expert Alumni

Can COGS (Line 42 on Schedule C) be a Negative Number?

Another way to look at is using the FMV of the gift. If you sell a gift, your FMV is the adjusted basis of the donor. If the person spent $400, your basis is their basis.

Carl
Level 15

Can COGS (Line 42 on Schedule C) be a Negative Number?

I'm not following you very clearly. But I do think that since 2021 is your first year of business or your first year of dealing with inventory, you're most likely doing it wrong. I'll do my best to explain "how it works". Now you may know how it works. That's fine. But I'm still gonna "put it out there" to ensure we're on the same page.

What you pay for inventory is not deductible until the tax year you actually sell that inventory. It doesn't matter what year you purchased that inventory either.

Beginning of Year (BOY) Inventory Balance - This value is what "you" paid for the inventory in your physical possession on Jan 1 of the tax year. This balance "must" match exactly your End of Year (EOY) Inventory Balance of the prior year. If it does not match, then you have some explaining to do, to the IRS. Be aware there is "NO REASON" the IRS will accept for it not matching. If this is your first year dealing with inventory, then your BOY Inventory Balance MUST be ZERO. No exceptions. Doesn't matter if you actually purchased that inventory 50 years ago. In your first year the BOY Balance has to be zero. There is no other possible way to make it match your prior year EOY balance, since you did not report any inventory the previous year.

Cost of Goods Sold (COGS) - What "you" paid for the inventory you actually sold during the tax year. Again, it doesn't matter if that inventory was purchased 50 years ago. This figure will include what you paid for that inventory 50 years ago. This is the amount that will be deducted from your gross taxable business income.

End of Year (EOY) Inventory Balance - What "you" paid for the inventory in your physical possession on Dec 31 of the tax year. Again, it does not matter in what year the inventory was purchased either.

Here's 2 examples, with the first one showing the first year dealing with inventory, and the 2nd one showing the 2nd year.

EXAMPLE 1:  Year one.

BOY Inventory Balance - $0

COGS - $5000. This is the amount that will be deducted from your gross taxable business income, so that you don't pay taxes on it.

EOY Inventory Balance $5000

The above example indicates you started the year with no inventory. Then during the year you purchased $10,000 of inventory, and sold $5000 of inventory. With this being the first year, when you actually purchased the inventory does not matter. You may have purchased at least some of it, 10 years ago. But since you sold $5000 of that inventory during the tax year, that leaves you with $5000 of inventory on Dec 31 of the tax year.

 

Example 2: Year two.

BOY Inventory Balance - $5000. Take note that this matches exactly the EOY inventory of the previous year.

COGS - $3000. This amount will be deducted from your gross business income so you don't pay taxes on it.

EOY Inventory Balance - $6000.

The above indicates you started the tax year with $5000 of inventory. Then during the year you purchased an additional $4000 of inventory, bringing your total inventory for that year to $9000. Then you sold $3000 of that inventory leaving you with an EOY balance of $6000.

 

Can COGS (Line 42 on Schedule C) be a Negative Number?


@BTCrafting wrote:

I wanted to check if a negative number is allowed for Cost of Goods Sold....


It is not allowed and, in fact, makes no sense since it indicates you sold a negative amount of merchandise.

 

If you are a small business taxpayer, you are not required to keep an inventory.

 

See https://www.irs.gov/publications/p334#en_US_2021_publink10005555

 

If you want to keep an inventory, then you should use the value as set forth by @ColeenD3 in the initial response to this thread.

Can COGS (Line 42 on Schedule C) be a Negative Number?

I think I'll just get an extension and get my taxes done by a tax professional (I know I won't be paying anything based on my "completed" taxes).

 

I already explained the situation with the purchases in another post and the same person told me to put my purchases as 0 and not a gift and now I'm getting different answers. Not blaming anyone at all, it's more of a wake up call. My taxes were alot more simple before this so it's time to make that step anyway.

 

Thank you all for freely helping others and sharing your insight!

Can COGS (Line 42 on Schedule C) be a Negative Number?


@BTCrafting wrote:

I already explained the situation with the purchases in another post and the same person told me to put my purchases as 0 and not a gift....


You can do that yourself, if that is the way you want to treat it and you want to use the COGS section; that is just another approach.

 

However, if you use that method (i.e., $0 for beginning of year inventory and $0 purchases), you cannot then have an ending inventory of any amount. In short, your COGS will also be $0.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies