Inventory that you have either trashed or donated will be reflected in a lower Ending Inventory, which will increase your Cost of Goods Sold. The calculation is:
Beginning Inventory + Purchases - Ending Inventory (which will be lower because the obsolete inventory is gone) = Cost of Goods Sold.
This calculation is accomplished on two screens:
Inventory that you have either trashed or donated will be reflected in a lower Ending Inventory, which will increase your Cost of Goods Sold. The calculation is:
Beginning Inventory + Purchases - Ending Inventory (which will be lower because the obsolete inventory is gone) = Cost of Goods Sold.
This calculation is accomplished on two screens:
So I basically just deduct the amount from the ending inventory figure? I'm confused.
Yes, exactly. It's not in your inventory any more because you got rid of it. So it decreases your inventory and increases your deduction for Cost of Goods Sold.
Okay, it is beginning to make sense, however, I track my actual COGS, for each item I sell, so I already know that number, but you are saying that will need to change by adding in the amount I'm disposing of.
Yes, because of the way COGS is calculated. If you see the screenshots that follow my answer, make sure that the "End of 2017" box is reduced by the cost of those items.
Okay, thank you. I tried to keep very good records of those items and thought that there would be a specific line for that as a contra account write off. Thanks again for your help. Appreciate it.
I was under the impression that the rules for a sole proprietor to write off inventory was not as simple as just reporting a lower inventory for cost of goods sold. I was under the impression that a sole proprietor would not be able to take that loss on the schedule C. Does anyone have any advice?
If you contribute inventory (property you sell in the course of your business), the amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your charitable contribution deduction from your opening inventory. It isn't part of the cost of goods sold.
If the cost of donated inventory isn't included in your opening inventory, the inventory's basis is zero and you can't claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.
Robert,
OK, say my inventory was 10,000 at the beginning of 2020. I enter 0 for end of 2020. Then the next screen asks how much of this amount was removed for personal use. I assume I enter the full 10,000. Is there anything else I need to do on Turbo Tax before I enter the 10,000 donation I made to the registered charity in late 2020?
No, you indicated that you withdrew the inventory 'for personal use'.
When you claim your Charitable Contribution, use the lower of FMV or Basis for your donated inventory.
Click this link for more info on Donated Inventory.
COGS (Cost of Goods Sold) is what "you" paid for the inventory. Just include what "you" paid for the inventory that was trashed, in your cost of goods sold.
So, I'm confused, of course...
when I increase my COGS by the worthless inventory, do I have to itemize that with my return or just keep it in my records?
Let me clarify.
I have $2000 of inventory consisting of 2000 widgets I paid a $1 each for, and I sell them for $2 each.
Of that inventory I sold 10 widgets and had to throw another 10 away because they were bad, defective or whatever.
I'm going to report that I sold $20 worth of inventory. That will allow me to deduct $10 for the ones I actually sold, and another $10 for the ones I had to throw away. My EOY inventory balance will be $1980.00
Hi - Thanks for your patience and this detailed answer. I think I understand what you are saying in your example, but at the same time I'm confused because of what I wasn't clear on when I asked the question.
When you're filing your Schedule C, how do you 'report' or 'keep track of' the Worthless Items taken out of inventory? Is this only in the store books or does it have to be itemized on the schedule C (somewhere) Outside of an audit, is 'beginning inventory' and 'ending inventory' all you have to report in regards to 'cost of goods sold'?
I appreciate your help
When you're filing your Schedule C, how do you 'report' or 'keep track of' the Worthless Items taken out of inventory?
Basically, you'd track that on your own books. Then just include your cost for those items in the COGS for that year, so that you can deduct from the current year's business income, what you paid for the inventory that became worthless during the year and was therefore dis-guarded.
Around my neck of the woods, this is most common in the food service industry where food goes bad after a period of time and can not be sold even to the pig farmers for them to use as slop.
Thanks again, Carl. Unfortunately, you're making my head swim! (Not your fault, though!)
Let me tell you about my situation. I'm in my mid-70's and I'm stone broke. in 2020 I decided to start selling my books and record collections online through eBay and other online services. I was surprised at how well I was doing but didn't have any idea how well I was really doing until PayPal sent me a 1099 for $30000+ dollars.
I'm not a business, nor a business man. Nor do I have the money higher an accountant (lots of COVID RELATed expenses including on going inability to truly breath.
So, I understand that because most things I sold I got more than I paid for that I made a profit and therefore I was a business and I have to file a schedule C.
But I don't have any formal organization (plust, if this is a business, it's the first year of this business) for example: I don't have a 'beginning inventory' I just have a spread sheet of ITEM NAME PRICE COST PROFIT/LOSS (AND some expenses)
I also do have lots of worthless collectibles due primarily to water damage. I had assumed that the cost of those items would be some sort of deduction rather than a nanipulation of intentory for COGS
IS THERE a simpler way for me to approach a simple informal 'business' or do I really have to act as though I'm a brick and mortar small business?
THanks
You don't need any "official" organization or company in order for the IRS to consider the income you earned via E-bay, Amazon and any other method you used to sell your stuff through, to be self-employed business income. (I think you already realize that.)
I don't have a 'beginning inventory' I just have a spread sheet of ITEM NAME PRICE COST PROFIT/LOSS (AND some expenses)
Oh but you do. Keep in mind also that you went into this endeavor with the "intent to make a profit" too. In your first year of business, the Beginning of Year (BOY) Inventory balance *MUST* be zero. Doesn't matter if you purchased that inventory 50 years before you started your business either. This is because the IRS says your BOY Inventory balance *must* match exactly, your prior year's End of Year (EOY) inventory balance. Since you were not self-employed and in business for your self in 2019, the only possible way for your 2020 BOY Inventory balance to match the 2019 EOY Inventory balance, is if the BOY Inventory balance for 2020 is zero. Period. So here's how this works for 2 years, assuming 2020 is the first year of business.
BOY Inventory Balance = $0 - This first year it "does not matter" if you purchased that inventory50 years ago. The BOY has to be zero so that it will match your prior year's EOY balance (which *has* to be zero since the business did not exist in 2019)
COGS (Cost of Goods Sold) = $1000 What 'You" paid for the inventory you actually sold during the tax year. It does not matter in what tax year you purchased that inventory either. This figure can also include inventory that you "literally" had to throw in the garbage because it was no longer salable.
EOY Inventory Balance = $2000 - What "you" paid for the inventory in your physical possession and not sold, on Dec 31 of the tax year.
Doing the math, you can see I started the first year of business with no inventory, sold $1000 of that inventory and ended the tax year with $2000. That $1000 is deductible from my gross business income.
If I want to close my business in 2020, one of the requirements is that I must have an EOY inventory balance of zero. One way to achieve this is to indicate that I removed $2000 of the inventory for personal use. That $2000 is fully taxable income too.
I had assumed that the cost of those items would be some sort of deduction rather than a nanipulation of intentory for COGS
Doesn't sound to me like you obtain these items for the purpose of resale with the intent to make a profit. If that's the case, then losses on personal items are never deductible, and never have been.
Since what you sold was books and other items that were your personal possessions, and based on the fact you "apparently" registered as a for-profit business with E-Bay (which is why they sent you a K-1), I would only include in the inventory those items that you "actually" sold. That would make both your EOY and BOY inventory balance zero. (that is, unless you continued to sell product in 2021 of course)
@Hal_Al is there a better way to handle this, even with a K-1? Can one do "inventory" with hobby income? I don't think they can.
I'm in my mid-70's and I'm stone broke. in 2020 I decided to start selling my books and record collections online
You should check out the VITA and TCE programs......
https://www.irs.gov/individuals/free-tax-return-preparation-for-qualifying-taxpayers
IGNORE the advice about your "inventory" since it sounds like you're just selling off your personal items that you've collected over the years......that's NOT inventory and you DON'T have a business. What you have are....at most.....capital gains from selling your personal possessions.
@Carl I've got desktop Deluxe. I don't see any way to enter COGS sold other than use inventory. I would enter 0 for BOY and EOY inventory. Then I would enter my original cost as "cost of purchases". That effectively gets the original cost to GOCS.
@ABALLIETT said "I also do have lots of worthless collectibles due primarily to water damage. I had assumed that the cost of those items would be some sort of deduction rather than a manipulation of inventory for COGS
No, Since these items are just personal property, and not really business inventory, you don't get to deduct them, at all. If for some reason, you think you qualify, then entering the original cost as GOGS is the way to write it off.
Thanks for you information. I have a Ebay business account because I had a Farm business 20 years ago when I opened my PayPal account. 😉
I have another question that's always bugging me. The reason my books and records have become worth more than I paid for them is that most of them are 20 years or more old. For the last 20 years I have paid monthly rent on temperature controlled storage space that has housed only my collections. Since what I have is only valueable because bbecasue I've been able to 'curate' the items in good condition for 20 years, I feel that that storage expense should be deductible. I understand that it isn't but I want to hear that from you (if true) that it is not deductible, is not a cost of the goods sold
Thank you