Is my inventory loss correctly reported?

[mcmilval]

On my 2019 Schedule C I reported some sales income but no net profit, with year end inventory of $5,536. For 2020 I made no sales and reported no Schedule C income, but TT nevertheless generated a Schedule C that carries over the 2019 $5,536 COG as a loss of gross income (on lines 4 and 7). I’m hoping it’s correct; can one of you experts reassure me?

[Mike9241]

you did not enter your 2020 year-end inventory value so Turbotax uses $0 resulting in a cost of goods sold equal to your beginning inventory.    there are rules that apply to inventory.  what happened to it in 2020?  did you terminate your business? did you dispose of your inventory such as tossing it in the garbage?   we can't tell you whether the 2020 loss is wrong or right unless we get further details on what happened.   you should also be aware that you may be subject to the hobby loss rules which could allow the IRS to disallow the 2019 loss.

[tagteam]

Can you check Part III of your Schedule C?

Your 2019 year end inventory of $5,536 should have carried over as your beginning inventory for the 2020 tax year.

It appears what may have happened is that you did not enter your 2020 year end inventory (which should also be $5,536 if you made no sales and had no purchases). If you did not enter a 2020 end of year figure for inventory, the $5,536 would have carried down to COGS, which would be inaccurate.

[mcmilval]

I appreciate the helpful diagnoses made by you and another. As you suggested, I left blank line 41 (inventory on hand at 2020 year end). Let me ask your obviously expert advice about correcting that mistake. I still have the inventory and am using it for 2021 sales. Apparently I should file an amended 2020 return with the $5,536 shown on line  41, thereby eliminating the phantom loss. Am I right?     

[tagteam]

@mcmilval 

Yes. Your reported loss is in error since you did not enter an ending inventory. 

You should amend your return and then use the ending inventory as your beginning inventory for 2021.

[Carl]

Using the 2020 tax year and 2020 tax return as an example, always keep this in mind.

Your beginning of year inventory must match exactly the prior year's end of year inventory. If it does not, then you have some 'splain' to do with the IRS. There is absolutely no reason the IRS will accept for why it does not match.

What this means if that your 2020 end of year inventory is zero, then you're 2021 beginning of year inventory absolutely positively must be zero. If it's not, then that's a flag to indicate you probably reported the incorrect end of year inventory on your 2020 return. That has a very high probability of resulting in an "audit by mail" from the IRS for your 2020 return, your 2021 return, or both.