We drop ship and bring products in before shipping to Customers...how do we handle cost of goods sold? do we need to separate our suppliers??

[tdc]

We drop-ship and bring product in as some of our Suppliers don't drop ship.  It's our understanding that any products we bring in, should be classified as Cost of Goods Sold and keep an inventory.  Any Suppliers we use that drop ship can be classified as an expense.  Is this correct? 

We are under 1 million in revenue for the year.  We've also read if you're under 1 million, you don't need to keep an inventory regardless of whether you're drop-shipping or bring the product in first.  Is this true?

If we do need to keep COGS separate from our drop-ship suppliers, it's our understanding that COGS is for all items purchased in 2017 regardless if they were paid for in 2017.  Whereas drop-ship expense is for all items paid in 2017.  Is this correct?

[PatriciaV · Accepted solution]

You may ignore inventory completely if your gross receipts were under $1 million. In this case, simply report the purchase of inventory as Materials, Supplies, or Merchandise for Resale.

See IRS Pub 334 Accounting for Inventory under "Qualifying Taxpayer."

For items that were drop-shipped, your expenses would be limited to the cost of the drop-shipper's services. If you purchased resale items and shipped them yourself, you would report the cost of the merchandise and any shipping/packaging costs.

As a cash-basis taxpayer, you may deduct any expenses that were paid before the end of the year. This includes payments via credit card, as this represents an obligation to pay. 

To assist you in classifying your expenses, use the Easy Guide under Business Expenses. These pages have additional information and blue links ("Learn More") that may be helpful.