Sole Prop. - Schedule C Inventory to Report

I started a new business in 2011 selling on Ebay - I had stock (merchandise) on hand at the end of the year but I am confused by the statement on the "Do You Have Inventory to Report?" page - It says:

Important: You are not required to report inventory if either of the following apply:
* You had less than $1million in sales of receipts in each of the last three years
*Your business is primarily providing a service, rather than selling a product.

Then right below that it says:

Businesses that generally must report inventory:
*Retail sales
*Wholesale sales


We'll stop there because that would be my business (retail/wholesale)

Ok - well I definitely have less than $1mil in sales.

So do I have to claim inventory or not?

The other thing is that if I decided I don't and click "No" it kicks me out to the business section again.

Does that mean if I don't claim inventory value at the end of the year that I cannot count the price I paid for my merchandise against my net income?

I looked for more info on the $1million in sales thing coming into play but didn't have any luck finding more info...

Hopefully the question is clear...this is a crash course for me - my wife has had a Sched C business that I've filed on our return for the last 5 years or so - so I think I'm generally familiar with the basics of the Sched C but this is all new to me since I haven't had to mess with inventory until now...

    Go ahead and claim/report inventory. It's a better tax advantage if you do. Just because it says you're not "required" to report inventory, doesn't mean you are "forbidden" from doing so. I've been reporting my inventory since day one, and find it makes the bookkeeping and tax filing simpler when I do so. It is however, important that you understand one thing and get it right.
     When you are asked for cost of goods sold, enter only what "you" paid for the goods you "actually" sold. Do not include the amount you paid for inventory you still have on hand.
    • But if I am taxed on my inventory why wouldn't I count what I paid for it?

      When I put in my inventory remaining at the end of the year my tax due amount goes why wouldn't I take the cost that I paid for it to bring it back down?

      I guess I'm just wondering what the advantages are of counting only what I sold while paying taxes on the inventory?

      Sorry if I'm missing something but I don't think I saw a line for cost of goods sold...what I saw immediately following the inventory is "Cost of Purchases" which I thought would be the total amount that I've paid in 2011 for all merchandise I received to sell in the future
    From what I could tell once I filed and reviewed everything I recommend that you claim inventory if you have inventory to claim

    When you look at the Schedule C form it's easier to see what Turbo tax is doing.

    You claim the inventory you have left where it asked for the value of your inventory

    Then put the full amount you paid in 2011 for inventory you purchased in 2011 the next section where it's asking for cost of goods

    Turbo tax automatically does the math for you.

    It takes the value you entered for your inventory at the end of the year out of the total paid and puts that on the line in Schedule C that's called "Cost of goods sold"

    Just make sure you use the same inventory number next year for "inventory at the beginning of the year"
    • Thanks N8K9. I think I will feel better reporting inventory. One question though, I am trying to figure out an easy way in Quickbooks to just pull up the exact amount I spent on inventory in 2011. It's all under an Inventory Asset account. Any idea?
    • Ok! I figured it out. Just a math thing. THANK YOU! Going to review and file soon.
    When you sell that inventory in 2012, then on your 2012 tax return you will then report what you paid for it as "cost of goods sold" thus reducing your 2012 taxable income. What year you purchased those goods in, is irrelevant. Also, that's the way the IRS says you must do it when reporting inventory. That's why they want to see the beginning of year inventory and end of year inventory costs. If you deduct it all this year, then next year you're going to have a monetary descrepancy between your 2011 end of year inventory, and 2012 beginning of year inventory. This will raise a red flag with the IRS.
     Additionally, not reporting it as inventory, but instead as supplies, may help you "this" year on taxes, but it will affect your 2012 taxes in exactly the opposite way when you file and report next year. It's also a PITA keeping track of inventory paid for/reported in 2011, and separating it from inventory paid for in 2012. If you sell product in 2012 that you paid for and reported costs of in 2011, you can't include that in your supplies cost in 2012, as you already did in 2011.  I've already been there, done that, and got the T-shirt from a previous business venture several years back. The bookkeeping is an absolute nightmare that I will never deal with again.
    • Does that mean I have to use the acrual method? Can I not use the cash method...or am I just confused.
    You can use the cash method. I do, and have no issues with inventory. Yeah, I thought I would have issues with that when I started. But worked it through and after printing the completed return and looking it over, it made perfect sense. You see, when you report your end of year inventory for 2011, it gets "carried over" (manually, by you) to your beginning of year inventory for 2012. Peice o' cake. (of course, you don't think that now, but next year that light bulb over your head will "switch on" and you'll see the light)
    • Thanks so much for your time! Very helpful :)
    • Hi there,

      One more question to clarify.

      I am first year in business and right now I am not reporting beginning or end inventory. However, I am putting in Cost of Purchases in that section. Does that make sense? Is this what constitutes as cash accounting?

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