Inventory for Taxes

[Belinda]

My tax lady has been telling me the last couple of years that I need to do inventory at the end of the year. How do y'all do this or do you even do it? Do you count the number of bottles of FO, molds and wax or what? I'm not even sure how to go about this.  I've spoken to two different wax people who haven't had to do this so I'm wondering if it differs by state or what.  As you can tell I've waited till now to do my taxes for last year LOL!

Thanks for your help!

[birdcharm]

I'm not in the business of selling candles, but I do know a little about inventory.  Your molds, melting pots, packaging materials, and other equipment would be items that are considered expenses, not a material that you sell.  So, then what you have would be any materials (wax, containers, etc.) that you bought that you can still use which you've set aside for making/selling. 

[Belinda]

On 6/29/2020 at 10:14 PM, birdcharm said:

I'm not in the business of selling candles, but I do know a little about inventory.  Your molds, melting pots, packaging materials, and other equipment would be items that are considered expenses, not a material that you sell.  So, then what you have would be any materials (wax, containers, etc.) that you bought that you can still use which you've set aside for making/selling. 

I always add up what I've spent and take that to her but she says I need to do inventory on what I have left at the end of the year. I spend WAY more than I make and like most here I'm addicted to FO's so I have tons of those that I've never even used so I guess I don't really understand what she's wanting. I went into my wax room and kind of did a quick assessment of how many bottles of FO I have and not even counting several shelves I had in the hundreds so I'm thinking that's not what she's wanting. I guess I'll just have to give her what I have and see if I did it right. I'm so not a business person and wish I had not filed a tax number to do this. It's just become a very expensive hobby where I make a little money but then turn around and spend three times that amount for supplies that I never seem to have time to use LOL! 

 

So are you thinking she wants a list of what I've spent, which I give her every year, and then supplies of what I have left over? 

[BusyBee]

Even though keeping inventory is critical part of business bookkeeping, most tax prepare might not ask for it as long as your other numbers look alright.  However, your numbers would look awful due to your excessive buying spree on FOs.  You are entitled to tax write off on anything that you have spent on your candle business, and it seems like your tax lady is trying to help you get it and trying to protect you.

 

It is always good business to keep 5 different categories of inventories in you business accounting book, but you don't have to do it in this detail.

1. Raw Materials Inventory:  Direct Raw Materials & Indirect Raw Materials

2. Maintenance, Repair, and Operating inventory

3. Work In Progress Inventory

4. Finished Goods Inventory

5. Packing Material Inventory

 

If you feel your business is too small to do the above, then you should at least do #1 Raw materials & #5 Packing materials inventory together for your tax lady.(Consult with your tax lady whether I am right about this.)

 

Raw materials & Packing materials inventory would be waxes, wicks, FOs, containers, labels(blank or printed), ink/toner, dyes, & anything that needed for candle making including such items like detergent for cleaning containers.  If you have a lot of finished candles that you haven't sold yet, then you might want to do separate inventory report on that also.  

 

When it comes to tax question, always consult with your accountant and only with your account.

[Paintguru]

Haven't gotten quite this far yet, but when I run business expenses through Turbo Tax, I believe it gives me the option to either go the inventory route or just look at what I spent vs. made.  

[birdcharm]

On 6/30/2020 at 11:45 PM, Belinda said:

I always add up what I've spent and take that to her but she says I need to do inventory on what I have left at the end of the year. I spend WAY more than I make and like most here I'm addicted to FO's so I have tons of those that I've never even used so I guess I don't really understand what she's wanting. I went into my wax room and kind of did a quick assessment of how many bottles of FO I have and not even counting several shelves I had in the hundreds so I'm thinking that's not what she's wanting. I guess I'll just have to give her what I have and see if I did it right. I'm so not a business person and wish I had not filed a tax number to do this. It's just become a very expensive hobby where I make a little money but then turn around and spend three times that amount for supplies that I never seem to have time to use LOL! 

 

So are you thinking she wants a list of what I've spent, which I give her every year, and then supplies of what I have left over? 

 

I think she's asking for a list of everything you have that is something that you might use in order to make products with for sale.  The best thing, imo, would be to make candles with those supplies and see how much of it you can sell before the year is out so you don't have so much in your stock.  🙂     If there are scents you want to personally use only, just treat them as something personal and don't include them on anything, either the expense list or the inventory.

 

 

[Belinda]

On 7/2/2020 at 5:26 PM, birdcharm said:

 

I think she's asking for a list of everything you have that is something that you might use in order to make products with for sale.  The best thing, imo, would be to make candles with those supplies and see how much of it you can sell before the year is out so you don't have so much in your stock.  🙂     If there are scents you want to personally use only, just treat them as something personal and don't include them on anything, either the expense list or the inventory.

 

 

I spoke to another tax lady today and she said I could go either route so I think I'm just going to add up what I've spent and what I've sold and do it the easy way LOL! I have WAY too much on hand to go through and count all of that stuff. 

[Belinda]

On 7/1/2020 at 10:38 AM, Paintguru said:

Haven't gotten quite this far yet, but when I run business expenses through Turbo Tax, I believe it gives me the option to either go the inventory route or just look at what I spent vs. made.  

That's what a different tax lady told me too. Ours apparently isn't working in our area due to the office in town being shut down so I found someone else. She said just add up what I've spent versus what I've made and any expenses. Thanks! This makes me feel much better.

[kandlekrazy]

My tax lady told me same thing and then when it got down to it she didn't need the actual inventory broken out just the $.  So I'd keep track of spending, sales and any product already made but not sold.

[birdcharm]

On 7/3/2020 at 10:56 PM, Belinda said:

... add up what I've spent versus what I've made and any expenses ...

 

I'm gathering that this means to add up what you've spent to make the candles you've sold, not everything you've spent, which makes sense to me.  It would not make sense to me if it was to add up everything you've spent without taking out what you haven't used in the form of inventory, because you can't write off all of your supplies, just what you've used to make your products, at least that's how I've always understood it.  The thing about doing the inventory is that it follows from year to year.

[Belinda]

10 hours ago, birdcharm said:

 

I'm gathering that this means to add up what you've spent to make the candles you've sold, not everything you've spent, which makes sense to me.  It would not make sense to me if it was to add up everything you've spent without taking out what you haven't used in the form of inventory, because you can't write off all of your supplies, just what you've used to make your products, at least that's how I've always understood it.  The thing about doing the inventory is that it follows from year to year.

That makes sense. I've been adding up everything I've spent whether I used it or not! Whoops! I won't do that this year.

[birdcharm]

Uh-oh!  That could be why you were being asked to create an inventory list, it would, in some ways, make an adjustment for your previous expense lists.  If it's only small amounts, I wouldn't worry about it, but otherwise, you might wish to consider claiming it as inventory, that would help set things right.  They really should have explained it all to you a little better from the beginning, but, as with many things, live & learn seems to be the way.  It might make you feel better to explain this to your new tax person to make sure they know what happened and see what they think.  Paperwork isn't one of my favorite things to do either!

[Belinda]

3 hours ago, birdcharm said:

Uh-oh!  That could be why you were being asked to create an inventory list, it would, in some ways, make an adjustment for your previous expense lists.  If it's only small amounts, I wouldn't worry about it, but otherwise, you might wish to consider claiming it as inventory, that would help set things right.  They really should have explained it all to you a little better from the beginning, but, as with many things, live & learn seems to be the way.  It might make you feel better to explain this to your new tax person to make sure they know what happened and see what they think.  Paperwork isn't one of my favorite things to do either!

I did ask her if I needed to add it even if I didn't use it and she said yes so I hope she knows what she's talking about LOL! 

[birdcharm]

On 7/7/2020 at 10:34 PM, Belinda said:

I did ask her if I needed to add it even if I didn't use it and she said yes so I hope she knows what she's talking about LOL! 

 

It's "yes" as long as you create a list of inventory for the products you didn't use to create your candles.  If you aren't going to subtract those expenses through an inventory list, then you can't write them off if you didn't use them.  For instance, if you spend $100 on supplies and use $25 of it to make some candles, you can't deduct the entire $100.  The only way you can do that would be to place $75 of those supplies into inventory, as that would be subtracted from your expenses and when you use those supplies in the future, then you can take them out.

[Belinda]

5 hours ago, birdcharm said:

 

It's "yes" as long as you create a list of inventory for the products you didn't use to create your candles.  If you aren't going to subtract those expenses through an inventory list, then you can't write them off if you didn't use them.  For instance, if you spend $100 on supplies and use $25 of it to make some candles, you can't deduct the entire $100.  The only way you can do that would be to place $75 of those supplies into inventory, as that would be subtracted from your expenses and when you use those supplies in the future, then you can take them out.

Oh ok, I see what you mean. Well, she's already submitted our taxes and I asked her about that so I hope she knows what she's talking about. I guess if I get a knock on my door from the IRS I will know for sure! I sure hope that doesn't happen.

[birdcharm]

They're your taxes! 

 

For this year, if I were you, I'd create a cost sheet for the candles I make ... not only will that help you to figure how much to sell them for, but at the end of the year, you'll know exactly what you spent to make them and your work will be done!

Edited July 11, 2020 by birdcharm

[MilosCandles]

All depends of your accounting method - https://support.taxslayer.com/hc/en-us/articles/360015704292-Schedule-C-Accounting-Method

 

I use the Cash Method so I do not worry about "Inventory".

 

 

[Paintguru]

On 7/22/2020 at 11:18 PM, MilosCandles said:

All depends of your accounting method - https://support.taxslayer.com/hc/en-us/articles/360015704292-Schedule-C-Accounting-Method

 

I use the Cash Method so I do not worry about "Inventory".

 

 

So is the cash method simply you compare what you buy in a year to what you sell?  If I buy 50 lbs of wax but only sell 3 candles, I would come out negative a bunch due to the entire cost of the wax?  I just want to make sure since this is my first year of really selling anything and I'd like a consistent method of tracking things.  

[birdcharm]

The cash method has to do with recognizing your transactions when they actually occur in any given year.  This is the common method of accounting if you don't offer terms, for instance, and you're paid when the product is sold.  It has nothing to do with keeping an inventory.  It's simply a matter of money in and out being noted when it occurs with no carry overs into another year.  If you purchase 50 pounds of wax and at the end of the year you still have that 50 pounds of wax that you intend to use to sell with the following year, the cost of the wax would be entered into your inventory until you sell it the following year.  In other words, on one hand, you will be deducting it as a supply expense, but you'll be adding it back in via your inventory until you actually use it (sell it), then it'll actually be considered. 

[Paintguru]

39 minutes ago, birdcharm said:

The cash method has to do with recognizing your transactions when they actually occur in any given year.  This is the common method of accounting if you don't offer terms, for instance, and you're paid when the product is sold.  It has nothing to do with keeping an inventory.  It's simply a matter of money in and out being noted when it occurs with no carry overs into another year.  If you purchase 50 pounds of wax and at the end of the year you still have that 50 pounds of wax that you intend to use to sell with the following year, the cost of the wax would be entered into your inventory until you sell it the following year.  In other words, on one hand, you will be deducting it as a supply expense, but you'll be adding it back in via your inventory until you actually use it (sell it), then it'll actually be considered. 

 

Ok, perhaps this is a stupid question, but for fixed expenses like insurance, equipment, etc., that doesn't actually go INTO the product, is that simply an expense you deduct for the year or do you pro-rate it across all your sales as a per item expense?  

 

EDIT:  I found some reading online.  I think I'm getting it.  This seems like it could be a major hassle for fragrance oils since they all cost slightly different amount.  Am I missing something?  I can see wax and containers being relatively easy to process.  

Edited November 4, 2020 by Paintguru

[birdcharm]

All of your expenses for running your business are something separate from your product (cost of goods).  I think an easy way to probably keep track of oils would be to keep track of the volume throughout the year that was purchased and then see what you have left at the end, that will tell you how much you've got left over and what you used.  You can then add up your supplier invoices to see how much the entire collection cost ... that's the hard part!  Kind of like eating a few chocolates and then counting up the calories! 🤭