How To Calculate Cost Of Goods Available For Sale 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 are self-employed and make or purchase items for resale, you must report inventory costs under current IRS rules. Every business owner is required to report these expenses on the back of their Schedule C tax form, as inventory costs are not deductible in the same way as other normal business expenses.

That’s why the IRS requires every business, no matter how small, to track inventory costs separately from all other business expenses. Your cost of inventory not only includes the costs you pay for these resale items or the parts needed to assemble all the items, but also includes all shipping costs and assembly fees.

You are not allowed to deduct inventory costs until the item is sold or otherwise permanently removed from your company’s inventory. All costs of unsold inventory must be carried over to the next tax year. Unsold inventory includes anything you haven’t sold, traded, trashed, given away, or donated. This also includes all items in stores and warehouses that have been sold in batches.

On the back of Schedule C of the Small Business Tax Form, there is a small section where you enter the value of your beginning inventory, the cost of any inventory you added during the current tax year, any inventory you removed for personal use, and your ending inventory. value of stock for the year.

For IRS inventory records that survive the tax audit, I have developed a formula called LATER – Lsit, Aaccount, Ttogether, Eevaluate and Report. Here’s how it works.

LIST – Write down all items purchased for resale as they arrive. Create a simple six vertical column chart on lined paper; I use a spiral notebook. Title these six columns as follows:

  • The name of the thing
  • Total cost
  • Number of items for sale
  • Unit cost
  • Remaining stock
  • Year-end value

Complete the first three columns when the goods arrive. To get the item cost, divide the total cost of each item by the number of items sold and enter this amount in the fourth column. You fill in the last two columns on the last business day of the tax year.

ACCOUNT – On the last day of the tax year, count the total unsold inventory; both on your shelves and on consignment. Enter this number as the remaining inventory for each item.

TOGETHER – Multiply the remaining inventory by the unit cost of each item and enter this value in the last column. Total everything in the second and last column. The first number is the total amount spent to add the item and the second is the value of your year-end inventory.

RATE – Review all remaining stock to assess its quality and shelf life. Remove any unsaleable items to trash, donate, or reserve for use in future campaigns. Deduct the value of trashed or donated inventory. Items used for future campaigns will be deducted as they are used.

REPORT – On the back of your Schedule C tax form, you will find a place to enter the total of all items included and your year-end inventory. Add up the beginning inventory and merchandise for the tax year and subtract the value of your remaining inventory to arrive at cost of goods sold.

The inventory value at the end of this year becomes the starting inventory value for the next tax year.

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

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