Inventory/Tax Question. Please Help!

[softballbomb]

Okay, I will try and explain this the best I can and please note, the amounts below are fiction but gives an accurate example of what I am needing help with.

I have been doing my own taxes for many years and own my own business which I am a single member LLC so I file as a disregarded entity. Anyway, I ended 2020 with an inventory of $150,000 so that means my starting inventory is $150,000 for 2021. I built up savings over the years so I took money out of my savings and purchased a lot of inventory through 2021 which ended up putting my ending inventory of 2021 of $450,000. 

What I am having trouble grasping is when I input all of my normal info into turbotax business editions such as gross income, COGS, other deductions such as fees, etc. I come to the inventory section where turbotax already has the beginning inventory at $150,000 which is of course correct and is not changed. I then input my ending inventory of 2021 at $450,000. It drastically made what I owe the IRS go up over $100,000 ?? Is this correct? I couldn't believe it as its saying my taxable income is almost $1M and it seems its because of my inventory. From what I understand, inventory is an asset correct? 

What I do not understand is why am I paying more in taxes for inventory that I purchased with money from my savings account that I had already paid taxes on through the years of earning it? I just do not understand how this works. Can someone please elaborate ?

For example, if I would have just left the cash in my savings and not purchased inventory with it, my taxes owed would not be $100,000 more since my inventory would have stayed around what the 2021 beginning inventory was - $150,000

Thanks in advance for any help.

[Anonymous_]

Did you input your 2021 inventory purchases as purchases?

Did you take a physical inventory at the end of the year and input that figure as your ending inventory?

[softballbomb]

Hello tagteam, thanks for your reply. Yes I did enter my COGS through all of 2021 into turbotax online in the Income & Expenses section and category "Cost of Purchases."

I cant access the forms section as I use turbotax online. But I see its the same thing, COGS.

[Anonymous_]

I am not certain where the issue could be with respect to your COGS.

If your beginning inventory is correct and you entered your purchases and ending inventory correctly, then your COGS should have been calculated by the program and should be accurate.

[softballbomb]

I do believe its accurate, I just dont get how there IRS can basically tax my inventory that I bought with cash saved from previous taxed earnings. I know its not a straight tax but it deducts the inventory from my COGS so its making it look like my COGS is $300,000 lower because of the excess inventory. Is this normal?

[Anonymous_]

@softballbomb I am not sure you have a good grasp on exactly what the COGS represents. It is basically the cost of the inventory you sold during the tax year and is subtracted from your gross receipts.

Since you are using the online version, the screenshot below may give you a better understanding.

[softballbomb]

Thanks for the screenshot, yes I think I do understand how it works. Starting inventory + purchases − ending inventory = cost of goods sold. 

Ive done all of that. Like I said my inventory grew by $300,000 in 2021 so was BOY 2021 was $150,000 and EOY 2021 is $450,000, so its $300,000 more than it was before and the IRS is calculating that as a deduction of my COGS sold which lowers my deduction thus making my income higher and having to pay a lot more taxes. I just want to know if this is normal? It seems I a paying a lot more tax this year because my inventory is higher. 

[Anonymous_]

You are not being taxed on your unsold inventory or because your inventory is higher.

For example, if your beginning inventory was $150,000 and you purchased $300,000 worth of inventory during the year, then you need to subtract your ending inventory from that $450,000 figure. The difference is your COGS.

If you sold nothing, then your COGS would be $0 ($450,000 beginning inventory plus purchases minus $450,000 ending inventory).

If your ending inventory was $350,000, that would mean you sold $100,000 worth of inventory.

[softballbomb]

I understand that, but was trying to simplify it a little. Here is my calculations which are just examples. I am comparing two years with only difference is the inventory at the end of the year.

Year 2020:

Gross Income $4,000,000

BOY $150,000

COGS $3,000,000

EOY $150,000

After all other deductions, taxes owed is $163,000

Year 2021:

Gross Income $4,000,000

BOY $150,000

COGS $3,000,000

EOY $400,000

After all other deductions, taxes owed is $290,000

So as you can see the only thing that changed from 2020 to 2021 was my EOY inventory which was $350,000 more and my taxes owed went up over $100,000 because of the increase in inventory.

[Anonymous_]

@softballbomb 

I still believe you are conflating purchases with COGS. For example, you did not post your purchases and you stated your COGS was $3,000,000. 

Also, were your gross receipts actually $4,000,000?

Please post your purchases for the two tax years. If your COGS was actually $3,000,000 for 2020, that implies that you purchased $3,000,000 worth of inventory in 2020 (if your BOY and EOY are the same).

[Anonymous_]

For 2021, the figures you posted imply that you purchased $3,250,000 worth of inventory.