What Is The Formula To Back Out Sales Tax How To Report Your Inventory To The IRS At Tax Time When Your Are Self-Employed

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How To Report Your Inventory To The IRS At Tax Time When Your Are Self-Employed

If you are self-employed and make or purchase inventory, according to current IRS regulations, you have inventory costs to report. Every business owner must report those expenses on their Schedule C tax form because inventory costs are not deductible in the same way as other normal business expenses.

Because of this, the IRS requires that every business, no matter how small, track inventory costs separately from all other business expenses. Your inventory costs include not only the costs you pay for resale items, or all the parts needed to assemble the items, but they also include all shipping charges and labor paid for assembly.

You are not allowed to deduct inventory costs until the item is sold or otherwise permanently removed from your business inventory. All costs of unsold inventory must be carried forward to the next tax year. Unsold inventory includes everything you don’t sell, don’t sell, don’t sell, give away or give away. It also includes all inventory items sitting in stores and warehouses sold on consignment.

There is a small section at the back of the Schedule C small business tax form where you fill in the value of your opening inventory, the cost of all inventory added during the tax year, any inventory that was removed for personal use, and your end. Annual price list.

To list records from the IRS that will survive a tax audit I created a formula called AFTER- Lbut, Acount, Total, AT THEappreciate and Report. Here’s how it works:

THE LIST – Write down all purchases so they can be resold as they arrive. Make a six-column vertical chart on lined paper; I use a circular notebook. Write those six lines as follows:

  • The name of the thing
  • Total cost
  • Number of items sold
  • For the price of each item
  • The rest of the list
  • Year-end value

Fill in the first three columns as the items arrive. To find the cost of each item divide the total cost of each item by the number of items sold and enter that amount in the fourth column. You will complete the last two columns on the last business day of the tax year.

ACCOUNT – On the last day of the tax year account for all unsold inventory; both on your shelves and out to be sold by consignment. Enter this count for each item as the remaining list.

TOTAL – Multiply your remaining inventory count by your cost per item and enter that cost in the final column. It’s everything in the second and last column. The first number is the total cost to add purchases and the second is the value of your year-end inventory.

EXAMINATION – Check all remaining inventory to assess its quality and shelf life. Remove all merchandise that will be discarded, donated or reserved for use in a future promotion. Deduct the value of any inventory that is discarded or donated. Items used for future promotions will be deducted when used.

REPORT – On the back of the Schedule C tax form you will find a place to enter the total of all purchases added together with your year-end inventory. Add the tax year’s opening inventory and inventory together, and subtract your remaining inventory value to complete the cost of goods sold.

The year-end inventory value becomes the next tax opening inventory value.

Take the time to create this six-column inventory chart at the beginning of the tax year, follow the LATER formula, and you’ll get those inventory reductions every time.

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