I’m closing our LLC because we paid for our inventory and that vendor went under so we never got our product. How do we account for the loss?

[AnaUT22]

We (2 people) started our online retail LLC in 2020 and a QB bookkeeper told us we should be on a cash basis. We purchased our inventory product from a vendor that manufactures everything in Turkey. Due to Covid, earthquakes and such that vendors business went under and our inventory was never sent to us. We prepaid for that inventory and have nothing to show for it. We invested $80,000 for that inventory. How do we account for this loss? This has been a nightmare.

[Anonymous_]

Did you purchase this inventory in the 2020 tax year? Did you file a Form 1065 for that year?

[AnaUT22]

We did. And for 2021. Let me add and clarify. The sole investor started the company with $100,000, we paid $85,000 to the vendor in Turkey. Received $5,000 worth of inventory with the other $80,000 to be shipped later but never did because they folded under bankruptcy. In the meantime, we sold what we had and claimed all sales and operating expenses over the 2020 and 2021 tax years. We followed the guidance of our QB bookkeeper doing a cash basis assuming we were going to receive all inventory at the time.

[Anonymous_]

Did you maintain an inventory? It appears as if if did maintain one.

If that is the case, the $80,000 could have been added to Purchases for the tax year in which the payment was made. Was it? That would have increased the firm's COGS and reduced its net profit (perhaps to the point where there was a net loss).

[Mike9241]

According to Pub 538, If you are a small business taxpayer (average annual gross receipts of less than $25 million), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you will not be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment for inventories. If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.

so if you expensed the payments for the goods, you've already taken a deduction for them. if not then there's a question of whether you   were using a allowable method of accounting. 

[AnaUT22]

Thank you so much for responding btw.

At the start, the full $85,000 was categorized as COGS, which was reduced based on 20’-21’sales. So our COGS is still showing we have the $80,000 which I have ended our 2022 year as true at 0 on hand. But TT is telling me that our liabilities and capital do not match the books.

I have -85,000 in assets and 0 liabilities and capital. Shouldn’t the liabilities and capital be a positive $85,000? 

[AnaUT22]

Ah. We wondering about this. We were just doing what our QB bookkeeper said to do at setup. 

[Anonymous_]

Your balance sheet should be in balance (at $0).

Did you reduce both your cash account and your inventories?

[AnaUT22]

Yes. Cash and inventory is all at 0. Our balance sheet has -85,000 net income, 0 assets, and negative $191 liabilities and positive $191 equity which cancels out to 0. When I run the “check entries for errors” in TT it’s saying that partners liabilities is not equal to total liabilities on balance sheet even though it says Income Reconciliation, Balance Sheet, and Capital Reconciliation are all “in balance”. It’s as if I’m missing inputting a value of 191 somewhere but not sure where or if it should positive or negative.

[Anonymous_]

Try Forms Mode as it is easier to see the discrepancies on Schedule L.

[AbrahamT]

The first thing we want to do is make sure you entered the balance sheet and income statements items correctly in TurboTax Business. Let’s start with the balance sheet items first.  

A-  Enter the 15,000 cash you have left over from the inventory (100,000 initial capital less 

     the 85,000 of inventory purchased) like this 

 

B-   Keep hitting Continue until you reach the input screen where to enter the 100k as your  

       Initial Capital Investment like this 

C-    Finally, go on top to Deductions, hit Cost of Goods Sold Section and enter 85,000 

        towards Purchases for the amount of inventory that you purchased like this 

 

D- Then finally, when all is said and done, Click View on top, then Forms. Look for  1120S pg. 3-5 and scroll down to Sch L like this, you should see your desired results. 

[Edited 01/26/23|4:57 pm PST]

[Anonymous_]

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@AbrahamT wrote:

Please take these steps to preview your 1040 in TurboTax Online: 

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This user apparently has balance sheet issues so the user would not be using TurboTax Online. 

Rather, the user must be working with TurboTax Business.

[also, the last post in this thread was posted a week ago]