Counting begining and ending inventory.

[ffrdacct]

@Anonymous_ Thank you for your quick response! I'm still confused though. 

Does reporting inventory as materials and supplies mean that I can deduct all inventory purchases as COGS?

[Anonymous_]

No, you simply deduct what you sell as materials and supplies.

COGS is calculated (i.e., you do not enter the figure) from beginning inventory plus purchases less ending inventory.

[JustineSCU]

I have a question in a similar vein. This is the first year I am noticing that a small business might not need to report inventory. I started a very small online resale business in 2016 (makes ~$3k/year). I reported inventory in 2016, and just have continued to carry that forward as the practice every year. However, if I want to stop reporting inventory, can I do that for 2021 and how? Officially, my beginning inventory from end of 2020 is $5,022, and if I were to enter it, the 2021 ending inventory is $6,346. I assume IRS wants to see a beginning inventory, since they know I have one? Can I just put $0 ending?

[Anonymous_]

You can convert it all to personal use if you are not required to maintain an inventory. 

[JustineSCU]

Thanks for the quick response @Anonymous_ ! I just want to be very sure, since doing so increases the refund I receive quite a bit - does this incorrectly indicate to the IRS that I am shuttering my business? I will continue to sell those inventory items in 2022 and beyond....

Also, if I do so, I suppose on a go-forward basis I just enter in the COGS for new inventory purchased in the relevant tax year?

[Anonymous_]

Just make sure your cost of goods sold equals zero (or reflects the amount of goods you actually sold during the year).

[Maria644]

HELP!! I am still confused with this tread. I am trying to enter the information in TurboTax and is removing everything.

We are a small business partnership. My small business just began this year, so our BOY inventory is $0, then we purchased inventory and paid it to begin business, purchases $2500, we sold some items but not a lot, so our  EOY inventory is $2000. In turbo tax under the deduction section in COGS the amount comes up to $500 BOY+Purchase-EOY=COGS. Per the comments above and because I am a small business making less than a million, I understand that now I need to also report purchases under Expenses as "Supplies" so that will be only the $2000 (Purchases-COGS?)? To avoid the "double deduction". Am I understanding this correctly? Or should I just enter $0 (zero) under my BOY and EOY and leave the "supplies" expense alone??

When I go to Supplies, this is getting me even more confuse: the TurboTax explanation:

Supplies:

Unless you deducted the cost in any earlier year, you can generally deduct the cost of materials and supplies actually used during the tax year.

If you keep incidental materials and supplies on hand, deduct the cost of the purchases during the tax year only if all three of the following requirements are met:
1. No record is kept of when used,
2. You do not take an inventory of the amount on hand at the beginning and end of the tax year, and
3. This method does not distort your income.

Include the cost of books, professional instruments, equipment, etc., normally used up in less than a year.

[Anonymous_]

You enter one or the other.

If you are maintaining an inventory, use the COGS section only. 

If you are not maintaining an inventory, use "Supplies" as an expense (based on what you sold) and do not enter any figures in the COGS secion.

[Maria644]

Because I am a small business that makes under $26 millions my understanding is that I can follow the cash basis accounting method and deduct the entire $2,500 which was my total expense of the year per my example.  How do I deduct the remainder $2000?

I am an online retail (if that helps).

1) If you are maintaining an inventory, use the COGS section only: 

BOY $0 + Purchase $2,500 - EOY $2,000 = COGS $500... where do I deduct the other $2,000 since my total expense of the year was $2,500?

2) If you are not maintaining an inventory, use "Supplies" as an expense (based on what you sold) and do not enter any figures in the COGS section.

Supplies sold: $500.... where do I deduct the other $2,000 since my total expense of the year was $2,500?

[Anonymous_]

You cannot deduct the entire amount of your purchases since your deduction as "Supplies" instead of COGS; your deduction needs to match income.

If you are not maintaining an inventory, then you need to deduct only the amount you have actually sold. Again, you cannot deduct the $2,000 until you sell that amount of inventory.

[OGF9396]

@DianeW777 

Hi, this is my first time filling out a Schedule C and I came across this post from last year in regards to inventory:

"You are correct! Under the Tax Cuts and Jobs Act (TCJA) of 2017, it is no longer necessary to enter inventory for the beginning or ending inventory for your business if the three year average gross income is less than $26 million.

In essence you no longer have to track the inventory that is still sitting on the shelves, unsold, at the end of the year. You can simply expense all purchases in the year of purchase.  This does reduce your income which was the intent." 

My question is, if the above applies to my business, what areas of Schedule C Part 3 (costs of goods sold) do I still need to fill out?  Would I just enter my costs of goods sold for the year on line 42 and leave lines 33-41 blank?

Thanks so much for your time and any answers!

[Anonymous_]

You basically deduct cost of the merchandise as you sell it as an expense.

 

See https://www.irs.gov/instructions/i1040sc#en_US_2022_publink24329wd0e2328

 

Treating inventory as non-incidental material or supplies.

If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid to acquire or produce the inventoriable items treated as materials and supplies in the year in which they are first used or consumed in your operations.

[DaveF1006]

No, you will not enter this on line 42 but you would enter these as expenses in your return. You could enter these as supply expenses or if you wished to be more detailed, you can scroll to an area entitled other miscellaneous expenses for a more detailed report. 

Line 42 is a calculated entry, meaning you would need to complete the cost of goods sold section above it for this to populate on line 42.

[OGF9396]

@Anonymous_ Thank you for your response, I did see this from one of your previous posts as well:

"If you are not maintaining an inventory, use "Supplies" as an expense (based on what you sold) and do not enter any figures in the COGS secion"

So this is the method that sounds like it applies to me, I believe.

[Anonymous_]

@OGF9396 

There are several ways to accomplish this, but you only need to remember that whatever method you use must "clearly reflect income".