I forgot to enter my inventory purchases when I filed my taxes for 2016 last year, do I need to resubmit taxes for 2016 to include this even though it is a year later?

[Maria5]

Upon working on my taxes this year, I realized I never enter my inventory purchases for 2016 when we did taxes for 2016, I had just started my business of retail clothing sales in 2016. I understand not entering these purchases may affect my cost of goods sold? However maybe not, since the cost of goods sold was $0 since I started with no inventory because of starting the business that year.  So does it matter that I did not include the purchases made during 2016? I did include the 2017 inventory purchases in the inventory/cost of goods sold this year that is why I realized and went back and saw that I did not put them in for last year. 

[TomYoung · Accepted solution]

If you sold anything at all in 2016 then, yes, you do need to amend that 2016 income tax return.

The formula for COGS is Beginning cost of inventory + Purchases for the year - Ending cost of inventory.

If 2016 was your first year of business then obviously your beginning inventory figure is $0.  Your purchases for the year are whatever they were and your ending inventory clearly is the sum of your purchases minus the cost of items sold.  The 2016 ending inventory, of course, is your 2017 beginning inventory.  And you repeat the above formula to come up with 2017 COGS.

If you entered sales but not the related cost of sales you clearly overstated your income in 2016 and amending should result in a refund of taxes.

Now, as a practical matter, I have no understanding of the magnitude of the dollars involved.  If you purchased, say, $1,000 of inventory in 2016, (let's say 100 items at $10 a pop), and only sold 3 of those items, then while your 2016 income is overstated it's only overstated by $30, which is not that big of a deal and even the IRS isn't going to really care, one way or the other.  If your 2016 misstatement is small, you may chose not to amend.  But, to achieve consistency, you'd state your opening 2017 inventory at $0, add together your 2016 and your 2017 purchases as "2017" purchases, and then value your 2017 ending inventory based on what was on hand at that time.  That way your overstatement of income in 2016 would be offset by your understatement of income in 2017.

You know what the actual numbers are, you need to decide.

Tom Young