Your COGS for taxes (Sched C) will be the value of previous year's closing inventory + purchases of stuff you sell or which go into making your goods + cost of labor + office supplies and other costs, MINUS the cost of stuff in your inventory at year end. Outright calls items that go to making your product "cost of goods sold", but think of this as "purchases" from the tax perspective. Schedule C has it pretty well laid out.
End of year 'inventory on hand'
Let me try to get a bit of clarification in my own mind about COGS… let me paint this hypothetical picture of a thriving young Alchemy business. They started their business on Jan 1st.. (to make the story simpler), and through out the year they periodically purchased several shipments of lead, which they transmute into Gold (making a tidy profit I might add).
Come the end of the year, and after referring to Outright, it was noted that during that calendar year $20,000 of lead had been purchased… but checking storage, shows that I still have $1000 of lead that is unused.
So… the question is… for the taxable year, Outright shows a COGS of $20,000, but actually only $19,000 was ‘sold’… shouldn’t the COGS column say $19,000 and the COGNQYS (Cost Of Good Not Quite Yet Sold) column read $1,000?
Since the COGS number directly affects the ultimate ‘Net Profit/Loss’ figure…how should ‘inventory on hand’ be categorized from Outright’s perspective?
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My understanding is that if you are doing business as "self-employed" you do not have to keep inventory. Please let me know if this is incorrect and where we can confirm in IRS regs.
If you purchase goods or supplies that you use to make something that you sell, you will have an inventory. Schedule C says nothing about differences between LLCs, corporations or sole-proprietors. For example, if you make wooden toys and sell them, you will have to buy wood, glue, paint, boxes, etc. If there are some of these items left over at the end of the year, the value of those goods are your inventory. Look at Schedule C and its instructions for more info.
I'm a sole prop and my tax accountant makes sure that he calculates in beginning and ending inventory in the cost of goods. This is how he calculates in within the cost of goods. I've changed the amounts to small basics.
COST OF GOOD SOLD:
Inventory, Beginning $200
Total goods $500
Less: Inventory, ending $150
TOTAL COST OF GOODS = $350
And while it is part of Cost of Goods Sold, it needs to be separated out. So I too would like to know how to do this within outright/gd bookkeeping. (is it possible?)
So I still have the same question as the OP
Thanks for your help!
Thanks for your help.
Outright would have to know how many products you sold and what component parts each product consisted of. Then, Outright could subtract them from the purchases you made (you would have to enter a count and a cost per part for your Cost of Goods purchases). It would be great if it had this capability, but it doesn't. I end up tallying all my sales and figuring out the component part usage in a spreadsheet. I also do a physical count of my inventory to make sure the numbers match close enough. I usually do this in the quiet week between Christmas and New Years so all the end of year stuff is done in a timely manner.
I am able to export my beginning and ending inventory from my online store host, and do the calculations in excel, so I am okay there, but I am just wondering where I put those tallied up numbers in outright . Would I create a category "Inventory Ending" under expenses and keep that under the Tax category of Cost of Goods? And if so, then how do I handle the "Beginning Inventory" as it's not really income, but it's considered an asset in which to deduct from. (as my little calculation above notes) I was told by my accountant that the IRS wants to see it separately on my year end income statement for my tax returns.
I would use Outright to give the breakdown on all income and expense categories (can do this with an export to Excel, then do a pivot table on all the categories). Then make a separate calculation for the cost of goods sold, just like it is shown in Schedule C, Part III. Since Outright does not really account for inventory, I think you should just keep it separate. Making it look like Schedule C will make your tax accountant happy!
SCHEDULE C Part III
Cost of Goods Sold (see instructions)
Method(s) used to value closing inventory:
Lower of cost or market
Other (attach explanation)
Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If “Yes,” attach explanation..........................
Inventory at beginning of year. If different from last year’s closing inventory, attach explanation... < LAST YEAR'S CLOSING INVENTORY
Purchases less cost of items withdrawn for personal use.............. < THIS IS ALL YOUR PURCHASES NEEDED FOR MAKING AND SHIPPING YOUR PRODUCTS, CALLED COST OF GOODS SOLD IN OUTRIGHT.
Cost of labor. Do not include any amounts paid to yourself..............
Materials and supplies........................
Add lines 35 through 39........................
Inventory at end of year........................ < YOU STILL NEED TO KNOW THE VALUE OF YOUR INVENTORY AT YEAR END.
Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4......
Wowza! Thank you - I found the PDF version of that form. This might be the first year that I really get things straight and understand this instead of throwing it all at my tax accountant like a hot potato. I will impress the hell out of him this go round. LOL. Plus I NEED to understand everything -- outright/gdbookkeeping has been the first step in really wrapping my head around some of this.
Now #37 (cost of labor) on that Schedule C form brings me to another question (moderators if I should start a new post, please let me know - I just have received great help here in this thread)
part III - #37 (cost of labor). This is the first year that I have employees. So, part of the labor is in actually assembling some of our own products and packaging them up. The other part of the labor is processing orders and shipping them out. I have that in the expense category under payroll, so what is #37 Cost of Labor accounting for -- just the hours of assembling a particular product or does it include the processing and packaging up of the orders as well? And IF it needs to be then included in Cost of Labor in the Cost of Goods, I assume, to prevent double expensing, it shouldn't be shown in payroll as another category? (except of course payroll tax, insurance etc which is separated out anyway)
I just did some googling and had a hard time getting an answer pinned down. And the instructions for that form on the IRS site, skip #37. (goes to #35 and then skips to #41).
I will call my accountant on this one, but if anyone knows, please post.
Thanks again UPO LLC for your help. Very much appreciated.
Yes, probably best to talk to the accountant on this one. Your accountant will be able to advise which line item your labor expenses should be entered on. Entered either as a Cost of Labor in Section III, or as Wages expense in Section II, the net profit will still be the same so there is no impact on taxes.
If your sales are under a million per year, you do not have to keep track of inventory.
"If your sales are under a million per year, you do not have to keep track of inventory."
I have not heard of that exemption before. Do you have an IRS reference? Thanks.