W2 income + 1099K losses

[ZSha]

I have both W2 income (after finishing the W2 portion, I owe the federal government some money and the state of NY owes me money).

I also have a side business for which I have a 1099K. The business didn't make any profit last year. So pretty much my entire investment didn't give me any return (i made some returns which were reinvested into the business 100% so by the cash method, I didn't take a single penny from the business account as a profit).

Example

W2 income based

-Federal: I owe $1000

-State: owes me $500

1099K income based

-Net loss of $5000 (after business expenses)

My question is, will the "losses" from my 1099K be able to offset the $500 I owe? Or will it be carried over until next year?

Thanks

[ZoltanB45]

As long as it was not passive activity, your business losses will offset W-2 income.

Side note, not taking money from the business account and re-investing in the business does not affect the profit. if you had $10,000 in sales and there was  profit of $4,000, you would have a gross profit. If you purchased $4,000 of more items to sell, you would still have a gross profit there. 

[ZSha]

Thanks.

Quick question with an example

Purchased items from China (and sold on amazon later) - $10,000 spent out of pocket

Amazon 1099K gross sales number - $30,000

Expense report from amazon (shipping costs, selling fees, transaction fees etc) - $20,000 

Expense of the business (including the purchased items from China) - $15,000

Will the math be like this

A. Gross sales (30K) minus Expenses report from amazon (20K) = 10K

B. 10K minus business expeneses (15k) =  (-5,000) net loss

Does that make sense? Or am I doing something wrong in the calculation?

[PatriciaV]

Yes, it appears you have a loss on this endeavor, if you are including business expenses other than the cost of the inventory.

[ZSha]

What about the initial cost of inventory? The amount of money I spent to purchase the inventory to start the business.

Is that not a business expense?

Thanks.

[TaxLawyerCPAinOhio]

Inventory is expensed as the items are sold. So, if everything you bought for $25,000 ($10,000 price plus $15,000 shipping and other acquisition cost) was sold you can deduct the enter $25,000 in 2021. But if only items you paid $5,000 for were sold by 31Dec2021, then you can only deduct $12,500 in 2021. 

[DawnC]

You have the option to use the COGS account or you can expense the purchases.   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.

 

Reporting inventory costs in TurboTax Home & Business

[ZSha]

So, If I use the cash method for tax purpose, does it mean

1. I ignore what's the number on 1099K (gross unadjusted sales from amazon)

2. My income is what I received from Amazon in my business bank account in 2021

3. My expenses are what I paid from my business bank account in 2021.

Is my understanding correct?

Thanks 

[AliciaP1]

In simple terms, yes.  Although, the only difference between using the 1099-K for your income and using your bank account for your income is that your bank account shows your income net of your fees paid to Amazon.  Be sure you don't double count them.

@ZSha