Cost of Goods

[JG EA]

Form 1065 Cost of Goods Sold doesn't have a line for materials and supplies as does the Schedule C.

Would you then put supplies used up in a service business on line 5 (other costs) or on line 2 (purchases)?

The reason I don't just want to add to the deductions list:

- the taxpayer has hired a QB expert that has this and contract labor listed in this section. I want to keep the tax return as close as possible to the P&L.

- the items are a part of the service (like to paint used in painting) and not just operating supplies.

This actually comes up fairly often, but I'd like to be more precise. I've been in the custom of putting on purchases line (and labor on labor line).

[Corduroy Frog]

There is a "Materials" line

JG, the items in Schedule A should be those costs which are imbedded in the product itself. If your partnership is a painting or decorating company, then "paint" is a material and should be included in the line provided. Wages paid to employees who do the painting or decorating are "wages."

Some companies associate certain overhead expenses as an integral part of the product. A manufacturing company, for example, should include building rent, utilities, engineering, occupancy costs, depreciation on production equipment, etc. These should go into "Other Costs" or even section 263A costs if required.

In a company such as you suggest, the overwhelming expenses of the entire company should be on Schedule A, and only administrative, selling, and misc operating expenses should be on page 1 of the 1065.

I think where the boat got hung on the reef is when you tried to conform your record-keeping for the tax return to the accounting structure designed by the QB installer. It should have been the other way around.

[dsi]

I must agree with the Frog on this one. It's similar to a singer trying to sing her song in the key the band selected, when the band should have played the song in a key that is more suited for the singer.

[JG EA]

JG, the items in Schedule A should be those costs which are imbedded in the product itself. If your partnership is a painting or decorating company, then "paint" is a material and should be included in the line provided. Wages paid to employees who do the painting or decorating are "wages."

Some companies associate certain overhead expenses as an integral part of the product. A manufacturing company, for example, should include building rent, utilities, engineering, occupancy costs, depreciation on production equipment, etc. These should go into "Other Costs" or even section 263A costs if required.

In a company such as you suggest, the overwhelming expenses of the entire company should be on Schedule A, and only administrative, selling, and misc operating expenses should be on page 1 of the 1065.

I think where the boat got hung on the reef is when you tried to conform your record-keeping for the tax return to the accounting structure designed by the QB installer. It should have been the other way around.

OK, I know I'm being dense here. Just to be sure I understand, for a Form 1065, are you saying the paint can go on Schedule A? If you are saying that what line? Purchases? And I was only going to put contract labor on the COG labor line. Wages were to go on Salaries and wages line.

[Gretel]

OK, I know I'm being dense here. Just to be sure I understand, for a Form 1065, are you saying the paint can go on Schedule A? If you are saying that what line? Purchases? And I was only going to put contract labor on the COG labor line. Wages were to go on Salaries and wages line.

JG, I would put the paint on Sch.A, other costs as well as the subs.

[Gretel]

I must agree with the Frog on this one. It's similar to a singer trying to sing her song in the key the band selected, when the band should have played the song in a key that is more suited for the singer.

Well, I respectfully disagree. QB provides a wealth of management tools and reporting if set up to benefit the client and be useful to the client. In my opinion this should be the top goal in using QB and the financials are just a by-product. Admittingly a very important one.

I feel that any tax preparer/accountant accepting QB data should have a basic understanding of how QB works, beyond financials. QB is not only dangerous in the hands of clients it is also dangerous in the hands of accountants if they do not understand the logic of QB.

[Corduroy Frog]

Product Costs

JG, this is exactly where it should go. Schedule A should include those expenses which are either "in" the finished product or else are so tied to the finished product that they would not exist if not for the product itself.

Ideally, all expenses should be "product" costs or "operating" costs in the larger sense. Wages, if paid to a painter should be a product cost. If paid to an office receptionist, these wages should be on page 1 of the 1065. The receptionist is not tied to the product, but tied to the business operation.

Paint becomes the finished product, and should be considered "Materials." Peripheral supplies such as brushes, drop cloths, paint remover, etc. do not remain with the finished product but they are so tied to the paint that they wouldn't exist without the painting process. These supplies should be considered "other" costs on the Schedule A.

Supplies such as trash bags for the office, etc. should be on page 1 of the 1065. Loan interest would also be a page 1 expense since borrowing money is attributable to the cash position of the company and not the painting process itself.

In the jargon of cost accounting, "costs" are those which apply to the product or production process and "expenses" apply to the rest of the business operation.

[JG EA]

Thanks to all. I am finally straightened out. Have you had so many problems with one tax return that you can't be sure of anything you do? I was having trouble with M-2 also, couldn't figure out where I went wrong until I did a cash flow and lo and behold the answer was the left over figure and then I could identify it.

After I posted last night I did more research and of course the answer about Schedule A was clear. I misunderstood your post CF and thought you were doubting my putting those expenses there. I reread it also and now see that the stuff about QB was an aside. I can see your point and I agree in many cases but not with this particular "expert".

Yes, Gabriele, I see what you are talking about - QB experts. I think she did a great job and since I saw what a mess it all was before she started, I really think she did miracles.