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SECTION 4. SMALL TAXPAYER EXCEPTION
.01 Pursuant to the discretion under sections 446(b) and 471, and to simplify
bookkeeping requirements for small taxpayers, the Commissioner, as a matter of
administrative convenience, will except qualifying taxpayers from the
requirements to use an accrual method under section 446 and to account for
inventories under section 471. For purposes of this revenue procedure,
notwithstanding section 1001 and the regulations thereunder, qualifying
taxpayers that use the cash method include amounts in income attributable to
open accounts receivable (i.e., receivables due in 120 days or less) as amounts
are actually or constructively received. However, section 1001 may be applicable
to other transactions. Qualifying taxpayers that do not want to account for
inventories must treat inventoriable items (i.e., merchandise purchased for
resale and raw materials purchased for use in producing finished goods) in the
same manner as materials and supplies that are not incidental under section
1.162-3. Section 263A does not apply to inventoriable items that are treated as
materials and supplies that are not incidental.
You can do it this way, but you'll have to keep track of the loss so you can carry it forward to net against future profits. I really don't think that's easier than just keeping track of your inventory.
Really? So buying $50,000 in inventory, selling $15,000 of it, but expensing all $50,000 of the inventory eliminates a distortion? Then selling the remaining $35,000 of inventory in a subsequent period without a corresponding cost of goods sold amount eliminates another distortion? Perhaps we have a different understanding of the meaning of the word. . .
They can use modified cash basis accounting, that's what its for (cash basis except for inventory).
You can do it this way, but you'll have to keep track of the loss so you can carry it forward to net against future profits. I really don't think that's easier than just keeping track of your inventory.
That assumes they don't have other taxable income to offset when the loss is incurred. In any event, tracking an NOL isn't very difficult since it's mainly a function of keeping a copy of your tax return, while some people would struggle with doing an inventory correctly.
Those distortions are OK and desired from what I've seen. First of all, the typical scenario is there's a working spouse and one starting the business. The working spouse looks at the net cash outlay and wants that on their tax return as a loss to reduce their tax bill. That reduction helps defray the startup capital requirements.
Again, just my experience with these types of situations.
The tax reduction in one year is matched by a tax increase the following year, with no net benefit. And they still have the big income distortions.
I’ve been doing this a long time, and in my experience, when everything is fully explained to them, my small business clients all wanted to go to accrual based accounting. Wanting to do cash basis has always been driven by a lack of understanding.
The tax reduction in one year is matched by a tax increase the following year, with no net benefit. And they still have the big income distortions.
I’ve been doing this a long time, and in my experience, when everything is fully explained to them, my small business clients all wanted to go to accrual based accounting. Wanting to do cash basis has always been driven by a lack of understanding.
Deferral has always been a basic tenet of tax planning. Plus, you can run into situations like 2017/2018 where there's a rate drop and you get permanent savings.
If inventory is kept level or grows, that deferral continues until inventory is depleted or the taxpayer is required to switch to accrual accounting for inventory because they exceed the $1 million in revenue.
I don't how you get much easier than to look at the businesses bank account and say it went up X or down Y this year, so that's the amount that goes on the tax return as the income or loss for the business.
Deferral has always been a basic tenet of tax planning.
Yes it has. But why don’t you tell us all about how spending X on unneeded inventory now in order to defer .25X in taxes is a good idea.
Quote:
If inventory is kept level or grows, that deferral continues until inventory is depleted or the taxpayer is required to switch to accrual accounting for inventory because they exceed the $1 million in revenue.
And now you double down on the unneeded inventory, or God forbid, actually increase your level of unneeded inventory? And you really see this as a good thing?
How much accounting/tax work have you actually done? Have you ever owned/run a business with a meaningful level of inventory?
Quote:
I don't how you get much easier than to look at the businesses bank account and say it went up X or down Y this year, so that's the amount that goes on the tax return as the income or loss for the business.
Yes, that’s pretty easy, but that isn’t how business taxes are calculated.
Yes it has. But why don’t you tell us all about how spending X on unneeded inventory now in order to defer .25X in taxes is a good idea.
And now you double down on the unneeded inventory, or God forbid, actually increase your level of unneeded inventory? And you really see this as a good thing?
How much accounting/tax work have you actually done? Have you ever owned/run a business with a meaningful level of inventory?
Yes, that’s pretty easy, but that isn’t how business taxes are calculated.
Not really sure why you're getting your panties in a twist over this. The exception exists for a reason, IRS doesn't usually just do these things on a whim. We're talking a business with $7k in gross receipts not WalMart.
Where in the facts has anyone said anything about unneeded inventory? Merchandising businesses need inventory to make money. If the business grows, typically the inventory does as well. How much business experience do you have that you question that basic concept?
You've given your opinion and I've given mine. Both are technically right, the OP can choose which method they prefer to employ.
My wife started a direct sales clothing business on her own in July. About $2000 in expenses (supplies, advertising, mileage, etc) incurred. She bought $13,500 worth of inventory and had sales (customers paying via Square and PayPal) of $7,000 . Am I correct that her income from her business was $0? And she had a loss of -$6500 ?
Okay, back to the original post.
No, she didn't have a loss. Fill out the Schedule C. She needs to calculate how much inventory she had on hand at the end of 2017. That gets added back in.
I'm going to guess here. She probably has a net profit of $2000 or so.
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