Where do I write off Obsolete Inventory which I have either trashed or donated ? Thank you.

[Carl]

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.

[ABALLIETT]

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?

[Carl]

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

[ABALLIETT]

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

[Carl]

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.

[ABALLIETT]

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

[Carl]

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.

[M-MTax]

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.

[Hal_Al]

@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.

[ABALLIETT]

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

[Hal_Al]

If you are reporting the income on schedule C (as a business) the storage  cost is deductible, since it is only used for business inventory.  Only the current year cost is deductible on your 2020 return. It is not part of cost of goods sold. You enter it, on Schedule C, as rent or other expenses.  If you reported a Schedule C in 2019 (or previous years), you could  amend  2019 to add the 2019 storage cost.

If you are only repotting the income as hobby income, or as capital gain on the sale of collectibles, the storage cost is not deductible.

[Carl]

Money received on the sale of collectables is just reported as other income. There are no deductions for that, other than what you actually paid for the item. Additionally, losses on such a sale are not deductible either, since losses on personal property have never been deductible.

I'd treat it like the other SCH C business property myself. But I'd not be claiming years worth of storage fees, as I would fully expect such a claim to set off fire alarms at the IRS, which would be the same as hanging out a sign that reads, "HEY! IRS! AUDIT ME NOW! PLEASE! HURRY! QUICK! FAST!"

When it comes to business inventory, nobody in their right mind is going to pay money to store it for years. Inventory is expected to move, and move rapidly, generally. Even car dealerships that deal will millions of dollars of inventory, can generally move it all within a year - even if they have to sell at a loss to make room for something they can sell for a profit.

[ABALLIETT]

Thanks for this, Carl. 

I accept what you say and will act accordingly but for the sake of my weak mind have to wonder how manufacturers who produce 'aged' products, like wine or bourbon, are able to account for their 'storage' time across many years. 

Also, is it likely that free tax advice for seniors programs would actually tackle something as 'complicated' as schedule C? 

Thanks much, Carl, et al

[Carl]

'aged' products, like wine or bourbon,

Those are produced with a clear intent to sell and clear intent to make a profit. It's a business model.

Someone who collects things such as antiques and can not demonstrate a clear intent to sell and clear intent to make a profit are not "in the business" for that.

I myself have quite a number of antiques that are definitely worth more than I originally paid for them years ago. I did not acquire them with the intent to make a profit, and I would have a hard time convincing anyone otherwise. Therefore any maintenance or storage costs incurred for those items during my ownership would not be a valid claim for deduction.

[ABALLIETT]

Thanks for making inventory and storage more clear.

Another thing I can't figure out is I'm going to use schedule C. Do I enter the 1099 on page one of the 1040 and also on the schedule C?

When I go through PayPal's  itemization of the 1099 I (fortunately) find a lot of entries that were not sales related, funds passed to me by friends for one reason or another but not marked as FRIEND.  How do I remove these items / amounts from my 1099 entry on my tax return as 'not income'? 

Thank you