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Old 02-08-2019, 11:09 AM
 
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Hi all,


I have this little side business I have been trying to give a go at the past couple of years. It's been a relative fail, but I certainly put a lot of time into it in both 2017 and 2018. I didn't bother doing anything with it during tax time in 2017, but with the recent tax reforms I'm thinking of filing a schedule c hoping that the loss can offset my tax liability this year.

I have inventory that I actually make- physical items I try to sell online and at flea markets, online printables, and instructionals. My SIL is actually a very successful youtuber and she supports her family through her brand. I was hoping to start up something, but I'm behind the game at this point. I would call it more than a hobby due to a wider scope than a single hobby activity, and that I do have a website, a youtube channel, instagram, twitter, facebook, etc.



Anyhow, how do I value the inventory I have? What I would sell it as retail? The material costs are pretty minimal, but the hours in making the stuff was equivalent to a part time job.



Any ideas are welcome.
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Old 02-08-2019, 11:29 AM
 
Location: Aurora Denveralis
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It's not really necessary to closely value of the inventory of a small side business such as yours, especially when there are questions about whether the value comes from materials or manufacture. Use a generous estimate of the cost of materials per item and leave it at that. Or, if it works for you, divide the cost of a batch of materials by the number of items produced.
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Old 02-08-2019, 11:42 AM
 
1,640 posts, read 613,024 times
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Quote:
Originally Posted by Quietude View Post
It's not really necessary to closely value of the inventory of a small side business such as yours, especially when there are questions about whether the value comes from materials or manufacture. Use a generous estimate of the cost of materials per item and leave it at that. Or, if it works for you, divide the cost of a batch of materials by the number of items produced.
Thanks for responding! I'm looking at turbotax and there is a labor question. That's the part I'm not sure about. I'm not a graphic designer (although i do some stuff like that), but they're a good example since they have billable hours creating whatever it is they create. How is something like that valued for the purpose of reporting on taxes? Maybe whatever the market rate is?
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Old 02-08-2019, 12:04 PM
 
Location: Aurora Denveralis
8,717 posts, read 3,984,022 times
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Quote:
Originally Posted by Cassy Fae View Post
Thanks for responding! I'm looking at turbotax and there is a labor question. That's the part I'm not sure about. I'm not a graphic designer (although i do some stuff like that), but they're a good example since they have billable hours creating whatever it is they create. How is something like that valued for the purpose of reporting on taxes? Maybe whatever the market rate is?
Again, inventory valuation is really a factor only for much larger businesses that buy or manufacture goods on a large scale and then sell them at a profit. The minor side "production" of craft-like goods doesn't really need a lot of effort or documentation. In general, it can be a mistake to try and value labor for such creation, especially if you are going to try and write that off as a cost of goods sold (COGS).

If you made furniture and had employees doing it, pretty much all wages, employee and shop costs could be claimed as COGS. But a one-person business doesn't need to get that convoluted.

If you spent an hour creating something that goes into inventory for sale later, it's legitimate to assign any actual cost of materials (including scraps and waste) to it. Deciding it was one hour of your time at $50/hour and assigning that to COGS is... slippery. That labor should then be taxable income to you and accounted for as a business cost, and you can see how it all gets pretty messy for a small-scale effort.

Unless there's something of unusual value in your labor, I'd just assign cost of materials and services (like printing) to inventory goods and leave it at that. Your income from selling it, less COGS, more or less equates to paying yourself to produce it. When you sell the item, you can deduct COGS and just keep all the proceeds as income - simple.
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Old 02-08-2019, 12:10 PM
 
1,640 posts, read 613,024 times
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Quote:
Originally Posted by Quietude View Post
Again, inventory valuation is really a factor only for much larger businesses that buy or manufacture goods on a large scale and then sell them at a profit. The minor side "production" of craft-like goods doesn't really need a lot of effort or documentation. In general, it can be a mistake to try and value labor for such creation, especially if you are going to try and write that off as a cost of goods sold (COGS).

If you made furniture and had employees doing it, pretty much all wages, employee and shop costs could be claimed as COGS. But a one-person business doesn't need to get that convoluted.

If you spent an hour creating something that goes into inventory for sale later, it's legitimate to assign any actual cost of materials (including scraps and waste) to it. Deciding it was one hour of your time at $50/hour and assigning that to COGS is... slippery. That labor should then be taxable income to you and accounted for as a business cost, and you can see how it all gets pretty messy for a small-scale effort.

Unless there's something of unusual value in your labor, I'd just assign cost of materials and services (like printing) to inventory goods and leave it at that. Your income from selling it, less COGS, more or less equates to paying yourself to produce it and then trying to deduct that cost from sale. When you sell the item, you can deduct COGS and just keep all the proceeds as income - simple.
Yeah. That makes sense. Thanks for the break down. There is no way to account for the time loss or my own labor unless something is sold or the brand takes off. If it doesn't, that's that I suppose.
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Old 02-08-2019, 12:22 PM
 
Location: Aurora Denveralis
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Quote:
Originally Posted by Cassy Fae View Post
Yeah. That makes sense. Thanks for the break down. There is no way to account for the time loss or my own labor unless something is sold or the brand takes off. If it doesn't, that's that I suppose.
If you get to the point where the items are being formally "manufactured," it's completely different. But creative productions by and from a one-person shop are best left at actual cost of materials.
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Old 02-08-2019, 12:52 PM
 
1,640 posts, read 613,024 times
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Quote:
Originally Posted by Quietude View Post
If you get to the point where the items are being formally "manufactured," it's completely different. But creative productions by and from a one-person shop are best left at actual cost of materials.
Yeah, and I don't think the material costs would provide enough of a deduction to pay for the turbotax software lol
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Old 02-08-2019, 01:11 PM
 
Location: Aurora Denveralis
8,717 posts, read 3,984,022 times
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Quote:
Originally Posted by Cassy Fae View Post
Yeah, and I don't think the material costs would provide enough of a deduction to pay for the turbotax software lol
Skip inventory altogether, then, and just put the materials down as COGS. That lets you round and cover waste and excess and such on a simple basis.
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Old 02-08-2019, 01:23 PM
 
1,640 posts, read 613,024 times
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Quote:
Originally Posted by Quietude View Post
Skip inventory altogether, then, and just put the materials down as COGS. That lets you round and cover waste and excess and such on a simple basis.
Ok, I'll try that. Thank you thank you thank you. It's $89 for turbotax business option. I'll see how that goes.
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Old 02-08-2019, 10:27 PM
 
7,972 posts, read 3,463,541 times
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Quote:
Originally Posted by Cassy Fae View Post
Hi all,


I have this little side business I have been trying to give a go at the past couple of years. It's been a relative fail, but I certainly put a lot of time into it in both 2017 and 2018. I didn't bother doing anything with it during tax time in 2017, but with the recent tax reforms I'm thinking of filing a schedule c hoping that the loss can offset my tax liability this year.

I have inventory that I actually make- physical items I try to sell online and at flea markets, online printables, and instructionals. My SIL is actually a very successful youtuber and she supports her family through her brand. I was hoping to start up something, but I'm behind the game at this point. I would call it more than a hobby due to a wider scope than a single hobby activity, and that I do have a website, a youtube channel, instagram, twitter, facebook, etc.



Anyhow, how do I value the inventory I have? What I would sell it as retail? The material costs are pretty minimal, but the hours in making the stuff was equivalent to a part time job.



Any ideas are welcome.
You will likely run up against the hobby loss rules, and any losses will be disallowed.
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