Sole Proprietorship-Deductions

[sisters3]

Hi there, hope someone can answer this. I understand the business deductions but not sure about the supplies purchased.

Do you claim $$ spent on wax, wicks, labels, etc. as an expense OR do you claim any and all supplies on hand and completed inventory as a liability at the end of the year.

I'm just curious, I have a CPA do my taxes but my candle company is only 6 months old and would like to know what to expect.

Hope I've asked the question properly. Thank you!

[deb426]

I calculate all expenses and then do an inventory and my accountant does the rest. If I don't use up all of a purchase, it shows up in inventory and I get the write off the next year. I don't inventory small purchases, they just get calculated as an expense.

[sisters3]

Thank you deb426! So I do submit all my wax, wicks, fo, jar, label, etc receipts to the accountant along with year end inventory, such as for example (90) wicks, (2) cases jars, AND (48) 8oz candles ?

[deb426]

I don't actually submit the receipts, I submit a summary of my purchases and categorize them. I keep the receipts in the event of an audit.

[sisters3]

Super, thank you for the info, I'm a very "complete" record keeper, but again, the candle company is young and a different kind of reporting (Sole Prop. vs. S-Corp), so any information is priceless to me right now. Thank you again!

[Seamist]

I have read that some inventory and some don't at the end of the year.

Would the only difference be that the deductions count for the year your in and you can't carry the supplies over to the next?

I am curios as to why some inventory and some don't. What would the advantages be at tax time.

Tax time is crazy and any info is helpful to me also.

Edited December 2, 2011 by Seamist

[Stella1952]

Inventory is part of how a manufacturing business computes COGS.

http://www.irs.gov/publications/p334/ch06.html

More on computing COGS...

http://taxguide.completetax.com/text/Q12_2330.asp

From the IRS...

Businesses that must account for an inventory generally use an accrual method of accounting for income as well as expenses.

The following items need to be taken into consideration when computing COGS:

• Inventory at the beginning of the year

• Purchases less cost of items withdrawn for personal use

• Labor costs (generally applies to manufacturing and mining operations)

• Materials and supplies (generally a manufacturing cost)

• Other costs (generally applies to manufacturing and mining operations)

• Inventory at the end of the year

To gain a better understanding of COGS, each of these items is further clarified below.

Inventory at the Beginning of the Year

Beginning inventory is the cost of merchandise on hand at the beginning of the year that is available for sale to customers. A manufacturer or producer should include the total cost of raw materials, work in process, finished goods and materials and supplies used in manufacturing the goods as part of the beginning inventory amount.

Generally, the beginning inventory amount will be identical to the closing inventory of the prior year. If there is a difference between the ending inventory and beginning inventory, a statement explaining the difference must be included with the filed tax return.

To read the full text of the IRS publication on the topic of inventory:

http://www.irs.gov/newsroom/article/0,,id=160515,00.html

The IRS has tons of publications to help answer questions about filing and what records must be maintained, etc.

A VERY IMPORTANT one to read is how IRS regards and defines hobby vs business...

http://www.irs.gov/irs/article/0,,id=186056,00.html

Edited December 2, 2011 by Stella1952