Counting begining and ending inventory.

[edselg58]

my wife makes fused glass items, jewlery and slumped glass bottles all of which are different. Do we just count the total number of items for the purposes of beginning inventory? Im confused. 

[Carl]

BOY - Beginning of Year Inventory Balance. What *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year.

COGS - Cost of goods sold. What *YOU* paid for the inventory you actually sold during the tax year.

EOY - End of Year Inventory Balance. What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year.

The BOY Inventory balance *MUST* match *exactly* the EOY Inventory Balance of the prior year. If it does not, then you have some explaining to do to the IRS. There is *no* explanation that is acceptable to the IRS either. So they MUST match, with no exceptions.

In your first year of business, or in the first year your business deals with inventory, your BOY Inventory Balance *must* be ZERO. There is no other possible way for it to match the prior year's EOY Inventory balance, since you did not report "any" inventory at the end of the prior year. It flat out does not matter if you purchased inventory 50 years ago either. The BOY balance in that first year "must" be ZERO. No exceptions.

Here's a few examples showing how this works for the first two years.

BOY Inventory Balance - $0 : What "you" paid for the inventory in your physical possession on Jan 1 of the tax year. It does not matter in what year the inventory was purchased either. Being the first year the business is dealing with inventory, the BOY balance *must* be ZERO. No exceptions.

COGS (Cost of Goods Sold) - $5000. What *YOU* paid for the inventory actually sold during the tax year.

EOY Inventory Balance - $2000. What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year.

The above shows that I started with $0 inventory and that amount matches the prior year EOY balance, since my business did not exist or report any inventory at the end of the prior year. I then sold $5000 of that inventory during the tax year, and that $5000 amount will be subtracted from my *taxable* business income, thus reducing the taxes I pay on that business income. At the end of the year I still have $2000 of inventory in my physical possession.

Do the math shows that during that year I had and/or purchased a total of $7000 of inventory, sold $5000 of that inventory leaving me with $2000 of inventory in my possession on Dec 31 of the tax year.

BOY Inventory Balance $2000 - What *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year. Take special note that this matches "EXACTLY" what my EOY balance was the previous tax year. It does not matter in what tax year this inventory was purchased.

COGS - Cost of Goods Sold $7000 - What *YOU* Paid for the inventory actually sold during the tax year. It does not matter in what tax year you paid for this inventory.

EOY Inventory Balance - $1000 - What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year. It does not matter in what tax year you paid for the inventory.

The above shows that on Jan 1 of the tax year I had $2000 of inventory in my physical possession. Then I sold $7000 of inventory during the tax year, ending the tax year with $1000 of inventory in my physical possession.

Doing the match shows that I purchased an additional $6000 of inventory during the tax year bringing the total inventory purchased to $8000. Of that total I sold $7000 of inventory leaving me with an EOY balance of $1000.

With the above examples you should now understand that what *YOU* paid for inventory is only deductible in the tax year you actually sell that inventory. It does not matter in what tax year you may have purchased it.  This actually makes it simpler and easier to account for non-sales reductions in inventory. For example, as you work through the COGS section of the program you'll see an option where you can report inventory that was removed for personal use. What you paid for personal use inventory is not deductible. But it does reduce your inventory balance so that your EOY balance will correctly agree with the next year's BOY balance.

There's also the allowance for loss of inventory such as spoilage (if your inventory is food items) that will reduce your inventory balances without taxing that which you paid for the now-spoiled, damaged, stolen or otherwise lost inventory item.

[tagteam · Accepted solution]

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@edselg58 wrote:

my wife makes fused glass items, jewlery and slumped glass bottles all of which are different. Do we just count the total number of items for the purposes of beginning inventory? Im confused. 

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You just need to do a physical count of your inventory which, obviously, will result in a dollar total.

As mentioned, if this is your first year in business, then your beginning inventory will be zero and the dollar total from your count will be placed in the "Purchases" category.

At the end of the year, you can take another physical count and that result will be your ending inventory.

The basic formula never changes:

Beginning Inventory PLUS Purchases MINUS Ending Inventory EQUALS Cost of Goods Sold.

[edselg]

Back again. We had inventory last year but did not sell anything. This year we sold 3 items. We have less than 1,000,000 in sales. Do we have to report inventory this year?  I did not pick up on this nugget of info below last year when using Turbo Tax:

Inventory is a company's merchandise, raw materials, and finished and unfinished products which have not yet been sold. Reporting inventory allows you to match your income with the expenses incurred in producing it, and calculate the cost of producing that income. If you have less than $1,000,000 in sales or receipts for each of the last three years, you are not required to report inventory. If you have inventory records you may want to report your inventory.

[chuck816]

This was posted by Turbo Tax just about a month ago:

Large businesses that purchase, produce, and sell merchandise to generate income usually keep inventory and use the accrual method of accounting. The inventory's value at year-end is subtracted from its value at the start of the year (plus purchases made during the year) to arrive at the cost of goods sold (COGS) for that year.

However, if your business' annual gross receipts for the last three tax years average out to $26 million or less per year, you can opt to use the cash method and expense the cost of inventory at the time it was purchased, rather than waiting until after it's been sold.

In TurboTax, you can report these costs in the inventory section as COGS or in the expenses section as supplies. Either way, you don't have to report inventory but you do need to carefully track what you paid for the products, materials, and supplies that go into your inventory.

https://ttlc.intuit.com/community/tax-topics/help/do-i-need-to-report-inventory/00/1700549

Based on that, I would say reporting BOY and EOY inventory is not required for companies with 3-year averages of less than $26 million.  Only COGS for sold inventory is required to be reported.

If I report BOY and EOY inventory this year, AND didn't sell any of that inventory, then my taxable income increases.  Which is infuriating that IRS is taxes us on purchased inventory.

I am looking for answers on this too, please correct me if I am  wrong.

[DianeW777]

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.  See the information at the link below.

@chuck816

[Edited: 02/04/2022 | 8:08a PST]

• CFR § 1.471-1 Need for Inventory

[tagteam]

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@chuck816 wrote:

If I report BOY and EOY inventory this year, AND didn't sell any of that inventory, then my taxable income increases.  Which is infuriating that IRS is taxes us on purchased inventory.

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You are not taxed on purchased inventory.

If you are not required to maintain an inventory, you can simply enter the dollar amount of inventory you sold during the year as an expense (supplies).

[chuck816]

@DianeW777 

Thank you Diane,

So, if BOY/EOY inventory reporting is not required for me on Form 1125-A, would I report UNSOLD inventory assets for this tax year on Line 27 (Supplies)  on the "Other Deductions Worksheet" for form 1120S?  Basically deducting my UNSOLD inventory as an expense?

Thank you.

[tagteam]

@chuck816 

You would absolutely not report your unsold inventory as an expense.

You would absolutely report the inventory you actually sold as an expense (Supplies).

[DianeW777]

According to TCJA, businesses with gross receipts below $26 million (for 2021) are considered eligible to use the cash method of accounting for their inventory.  

• TCJA Comparison for Businesses: The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017. 
• Revenue Procedure 2018-40 provides further details.
  • (1) Description of change. This change applies to a small business taxpayer, as defined in section 15.18(5)(a) of this revenue procedure, that wants to change its § 471 method of accounting for inventory items to one of the following:
    • (a) treating inventory as non-incidental materials and supplies under § 1.162- 3; OR or
    • (b) conforming to the taxpayer’s method of accounting reflected in its applicable financial statements, as defined in § 451(b)(3), with respect to the taxable year, or if the taxpayer does not have an applicable financial statement for the taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

The choice is yours. For this reason you can list your inventory as materials and supplies each year without carrying an ending inventory amount as long as you meet the gross receipts qualifier.  Under the revenue procedure, the gross receipts threshold in IRC Section 448(c) increases from $26 million for taxable years beginning in 2021 to $27 million for taxable years beginning in 2022.

@tagteam is a tax expert and is not wrong if you should choose (b) above.

@chuck816

[Edited: 02/04/2022 | 9:37p PST]

 

[depinat1]

so question if i had beginning inventory at 2000 and i didnt sell anything in the year would my ending inventory still be 2000? 

also if i made purchase of 800 in that year would that go under cost of purchases?

thanks in advance 

i have not been able to find a direct answer anywhere

[tagteam]

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@depinat1 wrote:

so question if i had beginning inventory at 2000 and i didnt sell anything in the year would my ending inventory still be 2000? 

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Yes, assuming you did not purchase any inventory during the tax year.

[tagteam]

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@depinat1 wrote:

also if i made purchase of 800 in that year would that go under cost of purchases?

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Yes, on Line 36 of your Schedule C under Purchases (see screenshot above).

[ffrdacct]

@tagteam I would like to ask you a couple of questions.

I have a two member LLC and my 2021 sales is less than $250k (first year of the business). Can I leave the Beginning of year Inventory and End of year inventory empty AND only report the COGS (inventory sold) in form 1125-A?

As far as I know, if in 2022, my sales is more than $250k, I will have to complete a Schedule L (Balance Sheet) Schedule M-1 (Reconciliation of Income) and Schedule M-2 (Analysis of Partner’s Capital Accounts). Without reporting inventory, how can I complete these sections in form 1065? 

Thank you!

[tagteam]

No. Either report your inventory the proper way or report your inventory as materials and supplies.