New client last year, previous preparer did not use inventory in figuring the cost of goods.(even though the taxpayer provided) She just used merchandise purchased as cost of goods, and I followed in 2014, but second thought,--can I start using the inventory for 2015? I have the numbers, will it raise a flag that there had not been inventory in 2014? What is the best way to handle?
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Hi JenMO - do you have to? There are exceptions.
From Pub 334 under "Inventories"
"Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later).
1.A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2.
2.A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18.
Qualifying taxpayer. You are a qualifying taxpayer if:
•Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3.)
•Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code.
Qualifying small business taxpayer. You are a qualifying small business taxpayer if:
•Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3.)
•You are not prohibited from using the cash method under section 448 of the Internal Revenue Code.
•Your principal business activity is an eligible business (described in Pub. 538 and Revenue Procedure 2002-28)." -
sole prop, sales under $350,000. What happens if she sells out (fabric s tore). there will be no cost in merchandise without inventory. Will I be able to bring back the inventory amount to have some cost in the sales?Comment
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Hmmm, lemme think here.....Is she better off deducting the merchandise against ordinary income?Originally posted by JenMO View PostComment
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Yes, a retail store is required to account for inventory and not take a tax deduction until sold. The eligible business to not account for inventory in Rev Proc 2002-28 are basically service companies in which the sale of hard goods is incidental to the overall business.
The sale of items purchased for resale, AKA inventory is always ordinary income whether it is in the ordinary course of business or selling the business.Comment
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I think the client is still a qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2 and can forego the accrual/inventory treatment.Comment
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I disagree. Section 4 of 2002-28 specifically states that retail trade is an ineligible business.Originally posted by BHoffman View PostComment
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That is the way I read 2002-28 also. Seems to be a lot of confusion on that. Thinking to fix that for new clients when previous preparer didn't put that is to put and ending inventory, not beginning for current year and go from there. I am thinking that would be no change in valuation??????Originally posted by kathyc2 View PostComment
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kathyc2, you are right and I am wrong. The only client I have with anything that looks like inventory is a repair shop, and both JenMO and Supermom's clients are retail stores. Very sorry!Originally posted by kathyc2 View PostComment
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