Cost of Goods Sold problem

[BrooklynCarol]

I don't understand the logic in Part III Cost of Goods Sold on Schedule C. I know that Cost of Goods Sold (COGS) is what I paid/materials used for the inventory I sold during the tax year. I make scarves and my raw material is yarn.

Line 35&40: my opening inventory was $1800, using a raw materials cost basis.

Line 41: my closing inventory was $3200. (I made a lot that I didn't sell yet.)

I had sales of $2500 with a cost basis of $1400.

So I calculate $3200 - $1800 = $1400 COGS. This matches what I thought.

HOWEVER in TurboTax, line 42 subtracts line 41 from line 40 so the math is $1800-$3200 = negative number = $0 COGS. What am I doing wrong??

Also can anyone explain what Line 38 Materials & Supplies means? I spent 30 minutes with an IRS agent and he could not find any documentation on the meaning of the line.  (How is that possible!)

[tagteam]

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@BrooklynCarol wrote:

What am I doing wrong??

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Just at first blush it appears as if you're not entering how much you paid for the material you bought during the year (i.e., your purchases).

[ThomasM125]

To arrive at cost of good sold, you take beginning inventory, add purchases and then subtract ending inventory. As mentioned by @tagteam , you are missing your purchases/materials. Materials and supplies is the cost of goods you purchase to manufacture what you sell, yarn in your case.

[Critter-3]

FYI ... small businesses with less than a million dollars in revenue can skip using the COGS section completely and simply deduct the costs as supplies each year.  

[tagteam]

I'm going to agree with @Critter-3; you don't need to bother maintaining an inventory at those levels, @BrooklynCarol 

[BrooklynCarol]

Two follow up questions.

1. If I've been using the beginning/ending inventory for 5 years, can I make the change to just listing my supplies and expenses without getting audited? I got the impression the IRS didn't like anything to change from one year to the next.

2. If I continue using Part III, can I put in all my expenses for 2023 in the Materials line, regardless of whether they were used in something that I sold in 2023? I cannot find anything in the documentation on timing of line 38.

thanks.

[PatriciaV]

Per IRS Pub 334, "If you want to change your method of accounting for inventory, you must file Form 3115, Application for Change in Accounting Method."

Report all the materials you purchased during the year, even if they were not used in sold goods. That is the purpose of the inventory entries - to track unfinished goods, as well as the cost of good that were sold.

Additional Information: IRS Pub 334 Inventories

@BrooklynCarol