This can be confusing if you let it. So don't let it.
In your first year of business or first year with inventory, your Beginning of Year Inventory Balace (BOY Inventory Balance) will be ZERO. No exceptions. What you paid for that inventory is not deductible until the tax year you actually sell it. Doesn't matter if that inventory was purchased 20 years ago either.
!st year:
BOY Inventory Balance - $0 (no exceptions) Inventory in your physical possession on Jan 1 of the tax year. Since your business did not exist on Jan 1 of the tax year, there's no way it could have an inventory balance greater than $0 on that date.
EOY (End of Year) Inventory balace - $1000 (This is 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 purchased that inventory either.
Cost of Goods Sold - $2000 What "you" paid for the inventory you actually sold during the tax year. THis is the amount deducted from your gross income before taxes are figured.
Using the numbers above shows that you started the tax year with $0 inventory balance. Then during the year you purchased/obtained/had $3000 of inventory. THen you sold $2000 of that inventory and ended the year with $1000 of inventory left.
2nd year:
BOY Inventory Balance - $1000. Your inventory balance on Jan 1 of the tax year. Note that for the 2nd year, the BOY balance "MUST" math the prior year's EOY balance. If it does not, you'll have some 'splainin' to do to the IRS, and there is no valid explanation you can provide, they will accept.
EOY Inventory Balance $1000 - Inventory in your possession on Dec 31 of the tax year.
Cost of Goods Sold - $1000 - What "you" paid for the inventory you actually sold during the tax year. This is the amount deducted from your gross business income before taxes are figured.
The above indicates you started your 2nd year with $1000 of inventory, you purchased an additional $1000 of inventory during the tax year, and sold $1000 of inventory during the tax year, leaving you with $1000 of inventory left at the end of the tax year.
Take note I only mentioned BOY, EOY inventory and COGS (Cost of Goods Sold). There are other categorys to allow for things like damaged inventory, inventory pulled for personal use, etc. The program covers this just fine.
