Inventory

[Super Mom]

I have a new client that has a store. The previous preparer put no ending inventory, this is the 3rd year in business. Can I just enter an ending inventory now, and do I answer yes on line 34 of part 3 on schedule C, and if so, how do I explain that without causing TP problems?

[Super Mom]

My thoughts is just to put an ending inventory not a beginning inventory for this year and go from there. Maybe that wouldn't be a change in valuation?????

[BHoffman]

Hi Supermom - 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)."

[Super Mom]

There seems to be much confusion on this. A retail trade a specifically excepted as an ineligible business in that Revenue procedure. I'm thinking the IRS would not give me a hard time to fix this by putting and ending inventory only this year and go from there?????? And say no to that question on schedule c for a change in valuation??????

[Super Mom]

There seems to be much confusion on this. A retail trade a specifically excepted as an ineligible business in that Revenue procedure. I'm thinking the IRS would not give me a hard time to fix this by putting and ending inventory only this year and go from there?????? And say no to that question on schedule c for a change in valuation??????

they use the cash method of accounting for the business, inventory is valued at cost, no accounting change right?

[Super Mom]

according to Pub 538 approval is not required for a correction to an error in figuring tax liability however, 3115 is required for a change in accounting method. A store can still be cash basis accounting and cost method for inventory, they just must account for inventory not sold, right?

[Super Mom]

Ok, I'm still questioning here on this one and must deal with this soon. Any ideas?

[Burke]

according to Pub 538 approval is not required for a correction to an error in figuring tax liability however, 3115 is required for a change in accounting method. A store can still be cash basis accounting and cost method for inventory, they just must account for inventory not sold, right?

Yes, they should. If you know the ending unsold inventory for 2015, put that on the return and go from there. Be sure your COGs is right since you do not have a beginning inventory figure, or else work backwards to get one.

[Super Mom]

Thanks, that was my thoughts, nice to have a second opinion!!