[NA]Small businesses, inventory & taxes[NA]

[Let'sgoflying!]

How does the annual inventory of retail items change the income taxes, (for non-depreciable items) in a small business (sole proprietorship, not a corp)?

Ie your company buys and resells widgets.
In 2010 you had 20000$ worth of widgets at tax time.
In 2011 you had 30000$ worth.
If everything else stays the same, what is the tax consequence of this change, in 2011?
I think this says the higher inventory provides a greater deduction.

 

[Let'sgoflying!]

If so, why?

When you buy the widgets, you get to deduct the cost of the purchase.
When you resell them, you are taxed on the sales price.
The net tax is on the markup.

Seems like the tax deduction is already covered when you buy them.

(we are talking about cash basis; not the other type of taxation basis....is it 'accrued'?)

 

[wabower]

IRS has special rules on inventory even if you are a cash basis TP. If you think it through, the ability to expense inventory when purchased would create the ability to manipulate income in a manner that they would find unacceptable.

If so, why?

When you buy the widgets, you get to deduct the cost of the purchase.
When you resell them, you are taxed on the sales price.
The net tax is on the markup.

Seems like the tax deduction is already covered when you buy them.

(we are talking about cash basis; not the other type of taxation basis....is it 'accrued'?)

 

[AggieMike88]

Want some fun... Try developing a valuation system on my inventory!

 

[Let'sgoflying!]

the ability to expense inventory when purchased

huh? That's exactly what happens, I deduct the cost of the widgets which I have bought in the preceding year.

 

[poadeleted20]

You need to get with a CPA to figure this. Too many variables to answer here.

 

[Let'sgoflying!]

You need to get with a CPA to figure this. Too many variables to answer here.

Please don't try to kill my thread. I think it is a simple enough scenario that answers are possible even from other business owners.

 

[poadeleted20]

Answers are possible. Only problem is you won't know if they are the right answer for you in your state and situation.

 

[Old Geek]

The article is pretty much wrong. He talks about depreciating/writing off stuff like small tools and office supplies as though they were inventory. Those things are usually classed as assets and should have been completely written off at the time of purchase with the $250,000/year early depreciation allowance.

As to true inventory, no. As far as the IRS is concerned it's taxed the same as money in the bank with a few exceptions. You can adjust the value of inventory by destroying scrap and subtracting that value. You can also readjust the value of an item to reflect the current cost of it. This used to be a big deal with electronics companies. Buy 1000 memory chips for $10 each, sell 500 of them, buy 500 more for $5 each, readjust the old 500 to $5 each. The IRS and the accounting world has very specific ways these readjustments are made and when they can be changed. Some accounting software packages can be configured to do this adjustment automatically. We use Peachtree and it does.

Finally, if you add value to the parts by building something out of them or marking them or whatever, the labor content has to be added to the part value for tax (and insurance) purposes.

 

[wabower]

Not if they meet the test of inventory as defined by the IRS. They are (or should be) classified as purchases and subject to the normal inventory accounting rules (beginning inventory + purchases -ending inventory= cost of goods sold) for determining profitability. Numerous inventory methods (specific cost, LIFO, LAFO, retail markup, etc.) can be used depending on circumstances, but most situations are covered in the regs.

huh? That's exactly what happens, I deduct the cost of the widgets which I have bought in the preceding year.