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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 ?
Inventory is not necessarily a business cost. It's a business asset that retains the value spent on it (less value changes and depreciation and so forth) and not an "expense" that went down some accounting drain. At certain levels, you even have to pay tax on it. (Which is why places like furniture stores and auto dealers try to clear out their inventory before the tax deadline - much cheaper to be taxed on 1,000 cars sitting in the lot than new-model-time's 5000.)
Once an inventory item is sold, it becomes a "cost of goods sold" and can be deducted.
So just roughly, and depending somewhat on the order of the transactions, she had $7k in income against $2k in expenses, less the cost of the goods sold (actual)... and retains in inventory the unsold items, at cost.
Inventory is not necessarily a business cost. It's a business asset that retains the value spent on it (less value changes and depreciation and so forth) and not an "expense" that went down some accounting drain. At certain levels, you even have to pay tax on it. (Which is why places like furniture stores and auto dealers try to clear out their inventory before the tax deadline - much cheaper to be taxed on 1,000 cars sitting in the lot than new-model-time's 5000.)
Once an inventory item is sold, it becomes a "cost of goods sold" and can be deducted.
So just roughly, and depending somewhat on the order of the transactions, she had $7k in income against $2k in expenses, less the cost of the goods sold (actual)... and retains in inventory the unsold items, at cost.
Actually, it IS necessarily a business cost. But it isn't an expense.
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 ?
Isn't her loss $8,500 ($7,000 - $13,500 - $2,000)?
Yes you can account for inventory on a cash basis. See Rev. Proc. 2001-10
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.
Inventory is not necessarily a business cost. It's a business asset that retains the value spent on it (less value changes and depreciation and so forth) and not an "expense" that went down some accounting drain. At certain levels, you even have to pay tax on it. (Which is why places like furniture stores and auto dealers try to clear out their inventory before the tax deadline - much cheaper to be taxed on 1,000 cars sitting in the lot than new-model-time's 5000.)
Once an inventory item is sold, it becomes a "cost of goods sold" and can be deducted.
So just roughly, and depending somewhat on the order of the transactions, she had $7k in income against $2k in expenses, less the cost of the goods sold (actual)... and retains in inventory the unsold items, at cost.
You may need a few more weeks of that really intense, and expensive, tax consultation.
Not sure why you seem to be experiencing frustration. The distinction isn't just a result of being overly pedantic - there is huge difference between a cost and an expense, and the terms aren't interchangeable.
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.
Yes, there is an exception. But using the cash basis is very foolish, because of the distortions that it can cause.
Yes, there is an exception. But using the cash basis is very foolish, because of the distortions that it can cause.
I disagree on these smaller enterprises. I think cash basis eliminates the distortions (people are usually thinking in terms of what's the net cash add/subtract from the business, that's what should be included in the tax return) and trying to get them to do a proper inventory is not easy to say the least. I'd rather have no inventory then a miscalculated inventory.
When they get to $1 million in sales they can afford to have someone handle that for them. Until then, the checkbook is the p/l and focus on sales.
Not sure why you seem to be experiencing frustration. The distinction isn't just a result of being overly pedantic - there is huge difference between a cost and an expense, and the terms aren't interchangeable.
That's not frustration, that's an oh-sh*t. I know the difference and if you read the whole sentence, I think it's right... but that term in that place is definitely wrong.
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Not. enough. coffee...
