Year end inventory

[Lightning Bug]

Can anyone give me a simple description of what a year end inventory includes and how it shows on the taxes. I have ordered some info from the IRS, but it hasn't arrived yet, and usually much of that still leaves questions. I have not sold anything this year, but have been testing etc. and have a fair amount of supplies on hand. I do want to file a tax on this business as to be able to deduct costs so far. If this isn't easily answered, I may have to go to a CPA, but have done our taxes for my greenhouse business without too much problem and had hoped this wouldn't be too much harder. TIA. Beth

[Ashleigh]

I'm not really sure how to do that either.. but for myself i have a file in excel that lists each fo (my name for it) then next to that the real name- who i get it from-how much much (oz) I have on what date then also keep track of what and how much I reorder...

Doesn't really help with taxes but I figured it would make it easier when I have to transfer that info somewhere else for taxes..

Would you mind sharing the link to the IRS info?

Thanks

Ash

[Budgie]

When I do my year end inventory, I include everything that is sold to customers, like: wax, wicks, jars, warning labels, labels on the candles or bath & body products, dye, fragrance, wick tabs, wick glue, shrink wrap etc... If it goes into the final product, then I include it. I've done it that way for the last 3 years and my CPA has never complained.:smiley2:

[sudsnwicks]

The year end inventory includes (1) ingredients and (2) finished products. For ingredients, you would look at what you have and then figure out what you paid for them. For finished products, you would have to figure out what it cost you to make them.

[BACKWOODS]

You need a total dollar amount from your finished products and all of your raw materials used to make them (was, dye, fragrance oil, labels, containers...you get the idea!!) Spreadsheets are great for this year end activity. I just use the same form each year that has all my raw materials listed on there and I update for current pricing. Then I just count everything and type in the amounts on the spread sheet and it calculates the amount for me. It takes awhile to set it up the first time, but it is a piece of cake once you save it and do it again next year!! Finished products are much the same, like someone mentioned before, figure out what it costs you to make one and multiply it out by what you have on hand.

[Lightning Bug]

Hi all! Ashleigh, I just went to the irs.gov site and went for the c form and any small business related publications. They will send them out to your home. I can figure the amounts, etc. but I still am unclear on what this is used for. Do you have to pay taxes on it to the feds? Or, is it used as an expense you get to subtact? Maybe this doesn't make sense, but I would hate to have to pay more on something I haven't made any money on yet. Also, where does the cost of goods used in testing come in...like wax, FO, wicks etc. that you used up. Maybe just following the form will answer these questions, but I like to understand ahead of time if possible. Thanks for the ideas on the spreadsheets. I keep my accounting on one and could make another to cover goods and usage. Thanks again, Beth

[sudsnwicks]

Lightning Bug, I read in an accounting book that "cost of goods sold" doesn't literally mean what you sold, but really it means cost of goods sold, lost, stolen, damaged, or unsaleable because the item has gone out of style. So, I would imagine testing falls into this category as well. The purpose of having a year end inventory is to subtract it from the cost of goods sold number. You are only allowed to deduct for things which you sold (or were lost, stolen, damaged, etc), and whatever is still sitting in your house at year end needs to be added back. Hope this makes sense.

[Lightning Bug]

I know I am slow...now I am up to what to figure in for the end number, but I guess now I wonder what you do with it. Say I have $1200 worth of wax, wicks, supplies etc. and I have not sold anything yet...do you pay tax on this amount or does it cancel out the supplies cost and just is what you have left? I know this probably doesn't make much sense. I do love Piglet though! Thanks for all your explanations. Beth

[sudsnwicks]

If you spent $1500 last year on supplies, and now you have $1200 worth of stuff (consisting of unused ingredients and completed candles), you'd be able to take a deduction for $300. That is, if I am understanding your situation correctly.

P.S. On second thought, it may look weird if you don't have any income from candle sales to deduct their expenses from. Another way to do it would be to wait until you have income from candle sales and then deduct your expenses from your sales figure.

[Lightning Bug]

Thanks all. It makes sense to me now. Beth

[DaisyFairy]

ok.. I have a question on this.. I filed my own taxes for the first time last year and I called the irs and talked to a cpa office..

the irs people (3 different ones) said I had to include the value of my molds, and equipment used in the inventory values... I didn't think this made sense but that is what I was told by them.. does anyone know anything about this.. I really wasn't sure they understood what I was asking them.

do you all include all your equipment in the inventory value and if so isn't there a depreciation of equipment value???

maybe I was just misinformed

thanks

DaisyFairy

[Budgie]

the irs people (3 different ones) said I had to include the value of my molds, and equipment used in the inventory values... I didn't think this made sense but that is what I was told by them.. does anyone know anything about this.. I really wasn't sure they understood what I was asking them.

do you all include all your equipment in the inventory value and if so isn't there a depreciation of equipment value???

thanks

DaisyFairy

Hmmm, I've never heard of that before. I usually include my equipment in my expense report under non-deductible and let my cpa figure it out. I thought she put it separate from inventory though.

[sudsnwicks]

do you all include all your equipment in the inventory value and if so isn't there a depreciation of equipment value???

If you include your equipment in the inventory value then yes, you would need to depreciate it over a period of time. However, my understanding is that depreciation is for the more expensive items. If you have $50 worth of molds it wouldn't be worth the trouble and would be simpler to deduct it under "supplies" during the year of purchase. For small amounts I doubt anyone would question it.

[Candle Man]

If I'm understanding this right you deduct amount sold from your cost then anything you have left over (finished goods or supplies) you add back in for the new year.

You can't deduct the supplies you bought that you have left?

Say I bought $10,000 worth of supplies for the year and I sold $2,000 worth at retail that would be approx. $1,000 profit. Then you deduct utilitys, office supplies ect. If these are more than you sold then would this mean you show a loss?

So in other words if you spend more (not counting un-used supplies) than you sold that is a loss?

I thought you could include your un-used supplies as money spent and that would show a greater loss.

I'm so confused with this.

Candle Man

[Nanasnecessities]

My accountant has me keep anything I buy over 100 dollars (office stuff or whatever) in a depreciatable file. I include my molds in here. They depreciate over so many years, you pay different on these and they do not count in your sales income.

The reason you want to do this is because this is what banks and other places look at in "your books" when you need a loan, or want to show how your business is doing.

She says anything over 100 bucks is the norm.

I try to spend 100 when I buy anything that I don't put into the product.

If you can, I would check into having your taxes done. It is so worth it. they know deductibles and stuff that you would miss. It may be worth it to do your own if you are not a business, but if you have a business it is they way to go. It makes shwoing your books look so much better. Mine saves me tons every year, I paid my tax lady 65 dollars the first couple of years, but have grown to much and now need her more than once a year. If you look around you may be able to find somebody very reasonable. Mine tax lady is now my accountant and it is such a relief to not have to worry if I am filing things right, or whatever. She also tells me if I can afford to hire another person and that I should spend so much money before the end of the year or I will have made to much. I like that part the most. She knows what the red flags are and such so you don't get audited, too.

[BACKWOODS]

So in other words if you spend more (not counting un-used supplies) than you sold that is a loss?

I thought you could include your un-used supplies as money spent and that would show a greater loss.

I'm so confused with this.

Candle Man

Candle Man

Unused supplies (raw materials for your product) can not be counted as money spent to show a greater loss because they are an asset and can be used to generate profits in the following year. That is why you need a year end inventory of all these supplies and your finished products to balance your receipts for these purchases.

I hope that clears it up some what for ya.

[sudsnwicks]

Ah, so $100 is the threshold to determine if a piece of equipment should be depreciated - that makes sense. My molds cost less than that, and I find it simpler just to deduct it in the year of purchase than having to keep track of it from year to year if you spread it out.

Candle Man, it may seem like a good idea in terms of tax savings to buy more supplies and show a greater loss (if this were allowed, though it isn't). But think of what happens the following year - you won't need to buy much and then you'll end up with higher than usual profit and have to pay more tax. The rule of thumb here is to deduct something the year it's sold, not the year it's purchased.

[DaisyFairy]

ok.. I think I have a little greater understanding now.. I will get help again this year and then I am gonna look into taking some small business/ business tax classes so I know more and understand better or possibly just look into getting an accountant/tax person. I think that would be much less headaches.

thanks for this discussion! I really need help understanding all this.

DaisyFairy

[RobinInOR]

And I'll throw in the confusing item that I don't do inventory at all - my taxes are coded as cash basis, and since I am under $1M gross income (I'm pretty sure I'm under that lol) my CPA told me I don't have to do inventory. Just put down income for the year, expenses for the year, subtract to get net, no cost of goods sold..

Every CPA seems to say something different though, so go with what your CPA tells you - they're the one that will be going with you to an audit

[sudsnwicks]

Robin, when you say "expenses for the year", don't you need to back out unused ingredients and unsold product? If so, wouldn't you still need to do an inventory?

[RobinInOR]

Nope, don't have to. It all evens out in the end. All ingredients I purchased last year were expensed last year even if I didn't use them. When I finally do use the ingredients and sell the product this year, I'll just have the income to report - the ingredients were expensed last year - so "more" income will show up this year to pay taxes on. It all catches up. You're right, if I had to remove what I didn't use, I'd have to do inventory, and then so what's the point? I leave the back of the Sched C completely empty, I just use the front. No COGS.

I usually do my heavy buying in January, so I don't have a bunch of ingredients, or finished product, around at the end of the year anyway.

Only inventory I do is for my own benefit to see what I need to order.

[sudsnwicks]

Thanks Robin, for the explanation. It is clear to me now. As I see it, as long as you pick one method, and stick with it from year to year, it should be no problem.

[DaisyFairy]

wow.. that would be nice... I do cash basis accounting method... I may ask about this with my accountant.. that would make things a lot simpler!!!

thanks robin! That may be a state thing too though... dunno..... but definitely worth a question or two..

DaisyFairy

[Trae]

I went to an accountant for the first time last year. I had been keeping track of everything thru Quick Books using the cash method. The accountant asked me about Cost of Goods Sold and I told her I don't keep an inventory so I don't do COGS. She told me I don't need an inventory to keep track of COGS. Didn't understand that one so this year I kept track using both cash and accrual methods in Quick Books and I'll give her both printouts and see which she wants to use. I'm finding the cash method easier but she's the one who signs her name on the forms so I'll let her handle it! Good luck!

Trae

[Candle Man]

Robin, This is what I found on the IRS site about a small business using the cash method

Qualifying small business taxpayer. You are a qualifying small business taxpayer if:

• Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. (Your average annual gross receipts for a tax year and the 2 preceding tax years and dividing the total by 3.)