Self Employed - Hand Made Production Parts - Scrap Rate Material Loss

[blade4sell]

Dear All, 

Any suggestions please. I am currently self-employed, working from home workshop. All my parts required hand labor. My question is about taking deductions on Scrap parts from fail attempts. For example, I would take a precut piece of titanium, each blank piece of titanium cost me about $3. I would hand stamp initials lettering or stamp artworks (Cross, Peace Sign, Skull, Butterfly, Heart etc...) onto the surface of titanium. If I stamp the letter or artwork crooked being off center, it is failed attempt and i would scrap it. Customers would not accept crooked letters. Because all my parts are handmade, there is no way for my to get 100% success production rate.  I would estimate that for every 10 order tries, about 2 tries failed on average. That's $6 loss for 2 piece. Can this loss be tax deduction for business production loss? If yes, where should I input this information? I have Turbo Tax Home Business

[Carl]

There's several ways to do this. But the simplest way is just to include your scrapped attempts in the Cost of Goods Sold in the Business Inventory section.

Is this viable for you? I ask, because if you pay your supplier for each individual piece that you scrap, you may want to do this differently to keep your books straight. Whereas if you are cutting the peices yourself from say, a single sheet that provides you with multiple pieces when cut, then including it in the cost of goods sold really isn't a problem and probably simpler.

[KrisD15]

 No, you don't report $6.00 as a loss, the "loss" is included when you report the total material cost.

You would not report a loss for the material, but you would report the material for the scrapped pieces as an expense. 

Only the pieces that you sell is counted as income. 

It works out the same. 

If you purchase 10 pieces at 3 each, you spent $30 for material. 

That is an expense. 

You don't say what they sell for, but lets say $10. 

So you expect to make $100.00, but you have to scrap 2 so you only make 80.00

The two pieces you scraped should be included in your material costs. 

You don't expense only $26 because you scrapped two, you expense the total raw material expense whether they result in a  marketable product or not. 

If you sell 8 for 80.00 and you had 30.00 material expense, your profit would be $50.00.

You don't think "Each piece is 7.00 profit and I only made 8 so my profit is $56.00".

Don't base it on material used for only the pieces you could sell, base it on all the material you went through.  

[blade4sell]

Regarding Cost of Goods Sold in the Business Inventory section, I don't have inventory (finish production). All my parts are custom made upon order. I would buy a piece of Titanium Sheets and send them to laser cutter. Then have cut parts send back to me. The laser cut service is (2X) more expensive than the material.  It cost $2 to laser each piece and $1 for material. But this example cost I'm using is from 2020. I am sure material price has gone up since. So each time i make a mistake and stamp the piece crooked, it's lost material and laser cut cost.

[blade4sell]

Thank you for your reply.

Per my reply to first message member, the $3 cost per piece includes Laser Cut fees. It's 2 to 1. The Laser cutting cost is 2X as material. 

Regarding "The two pieces you scraped should be included in your material costs."

Because all my parts are custom made upon order, I don't have inventory to report.  Turbo Tax noted to input my production supplies in the supplies/common expenses. I would enter the raw material cost of Titanium (no laser cut cost). Then in the Contract Labor section I would enter the amount paid for Laser Cutting.

Let's say 2021, every piece i have failed put into scrap box. I have not counted yet but it looks to be around 500pcs. If i put this 500pcs scrap in my material cost? Should i include the laser cut cost too?

any suggestions appreciated, thank you

[AliciaP1]

Since you are reporting the cost of the materials and the cutting at the time of the order, you do not need to do anything with the scrap.  The only thing that is missing is the revenue offset from the purchaser, but since the items are scrapped and not actually sold, this is correct.  If you cannot re-use the titanium after you have made the mistake, it is scrap waste and should not be held in inventory.  However, if you are able to recycle the titanium in any way, you do need to report that income.

@blade4sell

[blade4sell]

Once a failed attempt (hand stamp/die striking) the piece of titanium is unusable and cannot be recycle. Waste of material and the cost for Laser Cutting services. 

After thinking about it, since I will report the cost of Raw Titanium in supplies, the only lost from (hand stamping) fail attempts is the cost of laser cut services.

[Carl]

As costly as titanium is, I find it hard to see one just "throw it away" when the recycle value makes it worthwhile. I checked a local recycler here just for the heck of it, and when it comes to titanium they'll pay from $10 to $30 a pound depending on the purity. I would figure that if you're throwing away roughly 20% of your stock, it would make it worth a trip to the local recycler at least  once a quarter.

You may want to check into that as a way to increase revenue. Hey, if it gives you enough for a tank of gas once a quarter, then it's worth it.