Figuring Out Profitability From Gross Sales And Expenses Taxes Formula How To Report Your Inventory To The IRS At Tax Time When Your Are Self-Employed

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How To Report Your Inventory To The IRS At Tax Time When Your Are Self-Employed

If you work for yourself and make or buy items for resale, you have inventory expenses to report according to current IRS rules. Every business owner is required to report those expenses on the back of their Schedule C tax form because other normal business expenses such as inventory costs are not deductible.

Because of this, the IRS requires every business, no matter how small, to keep inventory expenses separate from all other business costs. Your inventory expenses include not only the cost you pay for those resale items, or all the parts needed to assemble the items, but also include all shipping charges and wages paid for assembly.

You are not allowed to deduct inventory expenses until an item is sold or otherwise permanently removed from your business inventory. All unsold inventory costs must be carried forward to the following tax year. Unsold inventory includes everything you haven’t sold, traded, trashed, given away, or donated. It also includes all inventory items sitting in stores and warehouses that are sold on consignment.

Schedule C is a small section on the back of the small business tax form where you fill in your opening inventory value, the cost of all inventory added in the current tax year, any inventory removed for personal use, and your ending year inventory value.

For IRS inventory records that will survive a tax audit, I created a formula called LATER. Lis Acalculation, TOtal, eEvaluation and Report. Here’s how it works:

List – Write down all items purchased for resale when those items arrive. Make a simple six vertical column chart on lined paper; I use a spiral notebook. Title those six columns as follows:

  • The name of the item
  • total expenditure
  • Number of salable items
  • Cost per item
  • The rest of the list
  • Year-end value

Fill in the first three columns as the items arrive. Divide the total cost of each item by the number of salable items to get the cost per item and enter that amount in column four. You will fill in the last two columns on the last business day of the tax year.

Account – Account for all inventory sold on the last day of the tax year; Both on your shelf and out for sale on consignment. Enter this count for each item as the rest of the list.

Total – Multiply your remaining inventory count by your cost per item for each item and enter that value in the last column. Total all in the second and last columns. The first number is the total spent on adding merchandise and the second is your year-end inventory value.

Rate it – View all remaining inventory to assess its quality and shelf life. Remove all unsellable merchandise to be sent to the trash, donated, or reserved for use in future promotions. Deduct the value of any inventory that is trashed or donated. Deductions will be made when items are used for future promotions.

Report – On the back of your Schedule C tax form you will find a place to enter all the merchandise added and your year-end inventory. Add the opening inventory and merchandise together for the tax year, and subtract your remaining inventory value to cover cost of goods sold.

The inventory value at the end of this year is the inventory value at the beginning of the following tax year.

Take the time to create this simple six-column inventory chart at the beginning of the tax year, follow the formula later, and you’ll get those inventory deductions every time.

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