First Time 1099-k, Need to Deduct Cost of Goods and Credit Card Fees

[riverofwind]

Hi I received a 1099-k for the first time this year.

Box 1a gross amount includes credit card fees and cost of goods I sold. Looks like here it says "As a result, you can subtract these items from the gross payment amount when filing your tax return." referring to fees paid. So when entering the 1099-k form information into Turbotax Home and Business Desktop version do I just subtract my credit card fees from the amount reported on the 1099-k I received and enter the new smaller gross amount in the Box 1a field in Turbotax? Or do I enter the fees elsewhere?

Also this gross amount includes the cost of goods I sold as well. I didn't make any significant amount of money off my inventory I just kinda ball-parked the cost of the goods when I sold them to clients and charged that amount without taking into account taxes on the purchase of goods and credit card fees on those transactions. We're talking dollars here above or below the actual cost I don't want to get all OCD on this stuff. Wondering if this is risky behavior at all...

Also can I report these cost of goods business costs in the Inventory / Cost of Goods Sold section or the Business Expenses section, whichever I prefer?

Anything else I should know?

Thanks!

[ThomasM125 · Accepted solution]

No, don't deduct anything from the Form 1099-K amount when you enter it. You should enter the gross receipts listed on the form when you enter the Form 1099-K so that the IRS can match the amount to the number reported to them. After you enter the Form 1099-K, go to the Self-Employment section under Wages and Income where you will see the business that TurboTax set up for you to report your business expenses.

The purchases should be reported in the Inventory section you will see when you enter your business expenses. Indicate that the beginning and ending inventory is $0 if you don't want to report inventory. You will see an option to enter your purchases in that section.

It would be best to document the cost of the goods sold in case you get audited, otherwise the deduction for those costs could be denied.

[riverofwind]

Thanks Thomas. So for credit card fees I do not deduct them from 1099-k gross amount and instead list them as a business expense?

Isn't the self employment section for non-businesses? I'm a business so can't find that section unless I'm missing something.

And the cost of goods sold will go in Cost of Purchases section at the end of the Inventory/Cost of Goods Sold section? Or somewhere else?

Can I still enter cost of goods sold if I enter $0 as beginning and ending inventory?

Also I kinda implicitly documented costs of goods sold as they are just the difference between total credit card transactions and labor credit card transactions. What would the IRS think of this?

[AmyC]

1. Yes, report the full 1099-k. List the fees as a business expense.

2. Self employment section is for those who are self-employed - work for themselves - business owners. When you work at a job, the employer withholds Medicare and Social Security tax from your paycheck. A self-employed person, must pay the employee and employer share of the tax. This is called the self-employment or SE tax.

3. Cost of goods sold is calculated for you by using your beginning and ending inventory. A new business will only have an ending inventory. You need to look at your inventory at the end of each year and place a value on it. It can be what you paid originally or current value.

4. You stated in your first post "I didn't make any significant amount of money off my inventory I just kinda ball-parked the cost of the goods when I sold them to clients" which leaves me wondering if you do a personal service, like decorating, and just sometimes sell stuff you have. However, inventory is stuff you own for the purpose of creating a product or selling.  You can't say that you sell inventory and then claim to not have any.

5. I think you are saying sales price is cost of item + labor. That is a fine method except every item, has a cost and is included in the inventory.

You might buy a chest and turn it into something else. The chest is inventory when purchased, even if you sell it as a chair for riding elephants later. In which case, you would have cloth in your inventory too.

I suggest Small Businesses Self-Employed to help you understand more about Deducting expenses and Operating a business.

[riverofwind]

Thanks Amy, my reply:

All my inventory are surge protectors and ethernet cables and occasionally something else computer related.

2. In Turbotax Home & Biz Desktop for Windows I cannot find a Self-Employment section under Wages and Income.

3. My mistake I meant the cost of purchases. So the cost of all the inventory I sold during the year. I put these Cost of Purchases section at the end of the Inventory/Cost of Goods Sold section? Or somewhere else?

5. I mean I charged inventory sold using the same Square setup as I charged labor too. I kept track of the labor costs. So the cost of goods sold throughout the year is the total Square transactions minus the total Square labor transactions. Do I need to track individual inventory restocking purchases every time I replace a surge protector, cable, or other?

[DianeW777]

In TurboTax Desktop you can reach the self employment or business section by using the steps below. 

If you are using TurboTax Desktop or TurboTax Online you can use the steps below:

1. Search function in the upper right and type Schedule C. Click on the Jump to.. link Continue to 'Let's gather your business info' OR
2. This will bring you to the screen 'Here's the business info we have so far' 
3. Select Edit  or Start beside your business and then scroll to Business Expenses, Assets, etc. to begin your entry. 
   • How do I report self employment income? 
   • Where do I enter my self employment business expenses
4. Inventory options: According to Tax Cuts and Jobs Act (TCJA), businesses with gross receipts below $30 million for the past three years are considered eligible to use the cash method of accounting for their inventory.  This allows you to be free of inventory tracking on a regular basis.
   • This means you can enter all of your purchases for resale as materials and supplies to reduce your current year income instead of using the inventory section. Using the inventory section requests the cost of the products on hand as of December 31st and that amount is on hold until sold which will not reduce your income for the current tax year, but will be used in the following year when you actually sell your merchandise. This repeats each year if you choose it.
5. You should always track your inventory restocking costs and labor if it's part of the actual inventory cost and deductible against your business income (1099-K, all cash transactions or bartering).

@riverofwind 

[riverofwind]

Thanks Dianne, did you mean Supplies in Other Common Business Expenses instead of materials and supplies? Materials and supplies is in the Inventory/Cost of Goods Sold section. Also here says you can use Cost of Goods Sold in the Inventory section or Supplies in Other Common Business Expenses.

And how do you choose one option over the other? Does it even matter?

[Vanessa A]

Either is fine.  It really just depends on your book keeping.  As Diane mentioned, if you use the inventory section, you would need to know your beginning and ending inventory amounts.  If you are tracking inventory, then you can enter it as Costs of Goods Sold>>Inventory.   If you enter it as Supplies, you will just be tracking your purchases throughout the year and entering the total amount of purchases.  

If this is your first year in business, how have you tracked your inventory?  The Cash method tends to be less cumbersome for people and it allows you to deduct your outflows of cash when you actually spend it instead of waiting until the inventory is used up to deduct it.