I started my own business. Selling Lularoe clothing. How do I get a deduction for this?

[SweetieJean]

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[Rainman12]

If your objective is to get a deduction, then you may have a Hobby, not a Business. For a Hobby, deductions can't exceed Sales ... <a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/business-or-hobby-answer-has-implications-for-deductions">https://www.irs.go...>

[Carl]

I see you're using the online version of TurboTax Deluxe. Since you were self-employed with your own business in 2016, you will have to upgrade to TurboTax Self-Employed with the online version. Basically, you'll be filing a SCH C with your personal tax return to show your business income, as well as your deductible business expenses. Since you're using the online version of the program, you *have* to use TurboTax Self-Employed. That's the only version online that has the full SCH C included.

Also, since your business obviously has inventory (the clothing you sell), here's some clarification that you will find helpful as you work the program through the SCH C section for your first time.

Beginning of Year (BOY) Inventory - For you, this will be a big, fat, ZERO. Since you started your business in 2016, the value of inventory your business had in it's possession on Jan 1 of the tax year was ZERO.

End of Year (EOY) inventory - The cost of (what *YOU* paid for it) the inventory in your physical possession on Dec 31 of the tax year.

Cost of Goods Sold (COGS) - What *you* paid for the inventory that you *actually * *sold* in the tax year. What tax year you paid for it, is irrelevant. Regardless of when you purchase your inventory, you can not deduct *your* cost for that inventory, until the tax year you actually sell it.

[marissadelisle]

I have a follow up question here because it looks like when reading the IRS code - if your gross receipts are less than $1 million - you can simply deduct the cost of your inventory purchases when you purchase them (instead of calculating COGS). Is that accurate?

[SweetieJean]

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[Carl]

This can lead to issues if you're audited. If you carry inventory, then report it as such regardless of your gross receipts. There are reasons for this that matter to *you*. If you report your inventory as an expense, then when you do something like remove some of that inventory for personal use, it can become a bookkeeping nightmare. If your inventory is volatile (goes bad, or expires) then when/if audited you will have a hard time proving your losses.
Play it safe, and report your inventory in COGS. It's not that hard, as I've been doing it for years.

Inventory is defined as those items or materials when assembled, become a material part of the product you sell. It does not including packaging. It's only those materials that become "a physical part of" the product you sell.

- Beginning of Year (BOY) Inventory - this is what *you* paid for the inventory in your physical possession on Jan 1 of the tax year. It does not matter in what year that inventory was purchased either. The amount entered here *MUST* match your End of Year (EOY) inventory from the previous year. So if 2016 is the first year you are reporting inventory, your BOY Inventory amount *must* be zero.

- End of Year (EOY) Inventory - this is what *you* paid for the inventory in your physical possession on Dec 31 of the tax year. It flat out does not matter in what year that inventory was purchased either.

 - Cost of Purchases - What *you* paid for the inventory you actually sold in the tax year. This will include the cost of any "free samples" or the such that you may have given away and/or used for advertising purposes. If used for advertising, you can not claim the cost a second time in the advertising expenses section. That would be double-dipping.

- Purchases withdrawn for Personal Use - That inventory included in the BOY Inventory figure above, that you removed for your personal use, or the use of your family/friends.

- Labor Cost - what you paid an employee to do something such as assemble the product using the materials you paid for and reported the cost of in the BOY Inventory box.Generally if you're reporting labor cost, that means you either have employees to whom you will be issuing a W-2, or contractors to whom you may be issuing a 1099-MISC.

- Materials & Supplies. These are items used in the manufacture of your final product, yet may or may not become "a material part of" the final product. For example, sandpaper, glass cleaner, protective plastic sheets (like you have on a new computer when you purchase it, and have to peel it off when you unpack it.)   The first two are "consumables" that are used to finish and clean your product. The last one is to keep the product from being scratched or tarnished before it's sold.

 - Other cost ot Prepare for Sales - The key word is "prepare". Examples would be packing materials, shipping boxes, tape and the such.

After you've entered the above information, the next screen will give you your preliminary gross profit. Doesn't mean it's all taxable though. You have to finish the business section first, to see what the net taxable profit is.

[marissadelisle]

I appreciate the responses. It's interesting that the two responses are contradicting each other. I understand the reasoning behind tracking inventory - the reason I ask is that the person I am assisting simply did not track her inventory (we are working on 2016 tax year) so it is pretty difficult to figure out. I was curious if per IRS code it would make sense to deduct as an expense for the first year of the business (2016) and then for 2017 (she is now tracking it as of mid-year so will have accurate year end inventory for 2017) do it 'correctly' by calculating COGS. That presents a problem however because it would assume her 2017 BOY inventory was zero, which is not accurate. I believe I read somewhere that it was okay to do a reasonable estimate of the inventory, which may be the best course of action.

[Carl]

Actually, it's more "personal choice" than contradictory really. Every one has their own (legal) way of doing this for their own reasons. Just offering you the option and the reason I choose the COGS option, even though I too qualify to just expense it.
"it would assume her 2017 BOY inventory was zero, which is not accurate."
Actually, from a paperwork/bookkeeping standpoint, not only is it accurate... it's spot on exactly perfect. Since your 2016 return has no inventory reported in the COGS section, your 2016 EOY inventory balance is zero. Therefore the only possible BOY inventory on your 2017 tax return *is* zero, since your 2017 BOY inventory must match your 2016 EOY inventory. So there is no problem with you starting to use COGS in 2017. Just be aware of the following.
If you expensed all your 2016 inventory on the 2016 return, then technically (and legally) speaking you've already deducted the cost of it. Therefore your 2017 BOY inventory would be zero.
So sell your 2016 inventory first. When you do sell it in/after 2017 you can't include it in your COGS at the end of the 2017 tax year. Doing so would be double-dipping since you already deducted that inventory as an expensed item on your 2016 taxes.