Inventory

[Oxtrainer]

Client operates as Independent Contractor doing houuse parties taking orders
and she receives orders and delivers to customers. Also sells direct from parties
maintaining small inventory. She is not required to keep inventory however it
is helpful to be able to deliver at the party. Is she required to maintain a formal
inventory or can she write these off as supplies.

Thanks in advance for you adviice

[jainen]

not supplies

If this is a business, it should be conducted in a business-like manner. I'm not sure what you mean by "formal" inventory. Her records do not need to be complex, only suitable for her business purpose. But, yes, she must track inventory through cost of goods sold. It is not supplies.

[veritas]

Well,

I have to disagree. Inventory is not required for a cash basis business whose sales are under a certian amount. I can't remember the amount but it would exempt most small business.

[veritas]

Business with sales under 1 million are exempt.

[solomon]

Rev. Proc.

RP 2002-28. Although inventory not required, items can be deducted as supplies only in the year sold - not purchased.

http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl4046/1/doc

[jainen]

No, no, no

No, no, no. They are exempt from the requirement to use the accrual method of accounting. But they still must report inventory.

Besides, if she doesn't even pay attention to her wholesale costs, how can she claim to have a business purpose? She can't perform the most basic of business analyses, such as setting an appropriate price or seeing if her overhead is too high.

[veritas]

Hey J

I haven't had so many no, nos since age 3.

[Bees Knees]

jainen is correct. The cash method exception does not negate the requirement to maintain inventories. It only means you can account for them as you would materials and supplies.

The instructions for Schedule C, Part III, Cost of Goods Sold says:

"However, if you are a qualifying tax-
payer or a qualifying small business tax-
payer, you can account for inventoriable
items in the same manner as materials and
supplies that are not incidental.”

“Under this accounting method, inven-
tory costs for raw materials purchased for
use in producing finished goods and mer-
chandise purchased for resale are deducti-
ble in the year the finished goods or
merchandise are sold (but not before the
year you paid for the raw materials or mer-
chandise, if you are also using the cash
method). Enter amounts paid for all raw
materials and merchandise during 2005 on
line 36. The amount you can deduct for
2005 is figured on line 42.”

Line 41 instructions say:

“If you account for inventoriable items in
the same manner as materials and supplies
that are not incidental, enter on line 41 the
portion of your raw materials and merchan-
dise purchased for resale that are included
on line 40 and were not sold during the
year.”

In other words, you still need to track inventory. The only difference here between this and the accrual method is that you do not need to accrue accounts receivable into income. You only deal with sales receipts that are actually collected and inventory items that you actually received payment for. Other than that, it is still a cost of goods sold situation.

[Unregistered]

No Inventory

Veritas is correct. Pub 538 states in part that a qualififying taxpayer (under 1 million) and a qualifiying small business (under 10 million) can choose not to keep inventories.

[jainen]

Pub 538 states in part

>>Pub 538 states in part<<

Don't you love being able to say, "in part"?

Actually, Pub 538 states that qualifying taxpayers can "account for inventoriable items as materials and supplies that are not incidental." Then later it explains just how to do that, by deducting "the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later."

So let's not get all twisted up about what it means "to keep inventories." For tax purposes, you always must account for and report income-producing merchandise separately from other expenses.

[sea-tax]

Not to change the subject , but What do you guys and gals do when a small mom & pop business does not keep inventory? I usually get a couple new sch c filers a year who have never been told to do an inventory account at years end.

Most of the time I try to get them to guess at a dollar value of inventory for at least year end so that by the following year I will be on track. I also explain to them how to take th inventory and why they need to do it.

Any other ideas and am I way off base?

[jainen]

I do the same

I do the same as you, except instead of a "guess" I ask for an "estimate." If they are claiming losses, the lack of inventory records is an important element in determining whether they have a profit motive.

[Unregistered]

Mark Up

If the goods sold have the same mark up then the sales for the year less the mark up is the cogs without beginning and ending inventory.

[Armando Beaujolais]

Some of you are using semantics to cop out on the need to keep records to accurately report income. Fine, a small business doesn't have to account for "inventory." All that means is that from a technical accounting method standpoint, inventory does not have to be accounted for under the accrual method. It in no way means that the "non-inventory" doesn't have to be accounted for.

The "non-inventory" can be accounted for in the same way as materials and supplies, which also cannot be written off until used.

From a bottom line standpoint, the only thing the small business exception does is keeps the taxpayer from having to report income when earned rather than waiting until cash comes in. The "non-inventory" is still not able to be taken as an expense until sold.

From a client standpoint, for 99.999999% of your cash basis clients, this technical difference has zero effect on the client's need to keep records of what's been sold and what is still on the "non-inventory" shelf. The only difference is the word "inventory" is crossed out, and a new lable called "Materials and Supplies" is written in. The recordkeeping is identical apart from that.

[JG EA]

Cost of Goods

It's interesting how some clients don't have any inventory, until they need to get a bank loan and need a better looking balance sheet.