Differences between Cost of Goods Sold in TT Business and Quickbooks

[spequigney]

I've used both programs for years and notice a problem this year that I don't recall from prior years.  I understand the difference between "cost of goods sold" and "inventory."  TT is focused on the former, QBs latter.  The problem is that my total income, ordinary business income and income per return from Schedule K are off by an amount that equals the amount of inventory in QBs used during the tax year.

The only way I can see to reconcile it is to add an expense item on the Schedule M-1 items worksheet, which flows through to the Schedule M-2 items worksheet - a book/tax difference.  Does this methodology seem correct?

[Mike9241]

maybe this is the problem. Quickbooks has two modes cash basis and accrual basis. in the cash basis mode Q does not recognize inventory.  so which mode did you use in the past for tax purposes.

[ZoltanB45]

You don't add expenses to make it work. Although an expenses is an expense at the end of the day, the IRS does look to see if the Gross Profit is reasonable. COGS is not an expense to play with.

In Quickbooks you would manually enter the information.  Purchases made during the year are recorded as either purchases or if you prefer, straight to inventory. To find out the cost of goods sold, you would make a journal entry crediting inventory and debiting cogs. 

You enter it virtually the same way in TT. TT should have the beginning inventory already flowing from last year's tax return. Then you tell them the purchases during the year. Finally, you enter the ending inventory. Then they calculate the COGS (they do the journal entry for you so to speak). 

A potential error may be that you entered your QB COGS as the purchase amount. Perhaps you had the ending inventory the same as the beginning inventory or maybe you entered it as Zero.,

First thing I would do is to look at the balance sheet to see if inventory is correct. Then work from there.

[spequigney]

Mike9241 thank you.  Accrual both places, been the case for many years.

[spequigney]

zoltanb thank you, you deserve that expert designation - this stuff causes brain fog in the average person. The way I do it is any item for resale is put into inventory, be it on a bill from PO, check, or credit card charge. It is then taken out of inventory on an invoice.
I can double-click on inventory on the balance sheet and see that what I called "...amount of inventory in QBs used during the year" is equal to the difference between the beginning and ending values. It is also equal to the difference between what TT and QBs define as cost of goods sold.
COGS is handled on Form 1125-A. TT remembers the ending inventory from the prior year - to this you add "purchases" which is what the QBs P&L statement calls COGS and subtract ending inventory from 2021, and that is what TT calls COGS. This is the correct number for tax purposes.
When you move to balance sheet reconciliations, retained earnings is off and it won't reconcile until you make an adjustment to difference between tax and book. So to your point about the IRS being sticklers on gross profit, the return is correct so I'm not concerned.
I made the adjustment on Schedule M-1 Worksheet, under "other timing expense items," as I could not get it to work in the Expense Items section above. The Smart Worksheet at the bottom makes the calculations; income per Schedule K line 18 less the net tax/book differences yields "Computed net income per books" which matches Net Income in QBs.

At the end of the day (this didn't occur to me when I first posted), I'm thinking my issue may be related to the fact that I'm using an older version of QBs.  Newer versions may define COGS in the way TT does, whereas my version defines purchases as COGS.  So - I think I'm square and perhaps this will be of help to others.

[spequigney]

Ignore this - in error, unable to delete