Bought materials in 2022 but received a check on 2023. When to report?

[olegkomliev]

Hello to all smart people. I need your help again.  I am single member LLC.

I bought an equipment for the project on Dec 2022, but did that project in Jan 2023 and receive a check in Jan 2023. Do I still need to report that equipment as expense for 2022 even if it will show me that I spent more than made in 2022. It was a bigger amount of money than I made during the year. For example I made $4000 during the year, but on Dec I spent $8000 for the project which was completed on Jan 2023.

[SharonD007]

Yes, you do need to report the business expense for the equipment on your 2022 tax return since you purchased it in 2022. You can depreciate the equipment (instead of taking the full cost of the expense) over the life of the asset by deducting a portion of the cost over several years (the life of the asset). There are three criteria that your equipment must meet to depreciate: the asset must be used to produce business income, it must wear out or lose value over time, and its useful life must be more than one year.

Please see the IRS FAQ on  Depreciation. You can also review the TurboTax Help article What is depreciation? 

[olegkomliev]

Thank you so much for answer, but I guess I need to explain word "equipment" in my case. I am security camera installer and when I said equipment its mean cameras and computer which I installed for the customer. I bought and them sold it to the customer. I don't think I can depreciate them. 

[Mike9241]

here are several options for 2022 for depreciating the equipment 

1)  only MACRS depreciation *(elect out of bonus/special depreciation and don't take any 179). if this represents 40% or more of the equipment purchased during the year, the mid-quarter convention would apply - this would produce the least depreciation deduction 

2) 179 depreciation - any amount up to 100% of the cost but the actual deduction is limited to net business income so some might not be deductible in 2022 but would carry over to be a 2023 deduction

3) special/ bonus deprecition.  this is automatic for 100% of the cost unless you elect out. it's like section 179 but does not have a business income limitation 

4) ADS depreciation which is straight line over the ADS life -the class is O -other and the life is 10 years depreciation type is NP.

[PattiF]

The items that you purchased for your business in 2022 but did not install until 2023 would be classified as inventory for 2022. When the items were installed in January of 2023, the items are removed from inventory and considered Cost of Goods Sold, COGS. 

Or you have the option to deduct the expense in 2022 for the items. Small businesses have the option to handle inventory either way.

Please see this TurboTax Help article for more information about Inventory.

@olegkomliev 

[olegkomliev]

Thank you. What way will be the best to show: as inventory or deduct as miscellaneous and write description materials and equipment for customer. I never had more expenses than income during the year before. Not sure if it will create a new headache for me from IRS. 

[PatriciaV]

It depends. If you don't mind reporting a loss for the year (which is fine as long as you don't make that a habit), you can report the expenses this year.

If you want to match the expenses with the income next year, then use the inventory option. Note that once you start reporting inventory and COGS, you must continue to use this method unless you request a change from the IRS.

When you report inventory and Cost of Goods Sold (COGS), the amount that is expensed in the current year is the difference between ending inventory and purchases plus beginning inventory (zero in your case). If your purchases equal your ending inventory, nothing is reported as COGS. Instead, this becomes your beginning inventory next year. Then next year when you report a zero ending inventory, the total amount of beginning inventory is reported as COGS. Here's an example:

This Year

Beginning Inventory = 0

Purchases = 8,000

Ending Inventory = 8,000

COGS = 0

Taxable Income = 4,000 - 0 = <4,000> (a loss)

Next Year

Beginning Inventory = 8,000

Purchases = 0

Ending Inventory = 0

COGS = 8,000

Taxable Income = 10,000 - 8,000 = 2,000

[olegkomliev]

Thank you for your answer and help