Tax question for those of us who sell a LOT of pens....that time of the year again...

[redfishsc]

Last year I sold a pile of pens that were kits purchased the year before (2008). How can I legally, cleanly claim these kit costs on my 2009 taxes? My tax preparer told me a couple years ago that trying to do this would be a mess b/c I'd have to keep an inventory list (and pay taxes on the inventory..... which sounds like a filthy unethical requirement by the government).


The kits in question were not counted in my previous year taxes.

I only count the kit/blank costs on things used and sold. So if I ordered 5 extra Sierras, they don't get counted as "supply cost" unless I use them for something sold.

For the first few years of penturning, the number of pens I sold were low enough that I was itemizing out what each pen cost in kit and blank prices (things like sandpaper and glue were done as a lump supply).

Now that's just not practical. Too many pens and too little time.


So I guess this boils down to two questions:

1) Can I claim, on my 2009 taxes, supply costs for pens sold in 2009 but the supplies were bought in 2008?

2) How do you guys keep up with all the receipts, especially kits you "sit on" beyond the calendar year, and pens you make but don't sell before the calendar year?




FWIW "Commodity" items like glue, sandpaper, etc. is never itemized out, it's always counted in total the year it was purchases. I'm only talking about things like blanks/kits that are 1 time use items.

 

[DCBluesman]

Unless you have established your pen sales as a separate, taxable entity, all income and expenses are calculated on a cash basis. As a cash basis taxpayer, you cannot deduct prior year expenditures. You may, however, be able to file an amended return for prior year's expenditures. Please be sure to consult a qualified tax preparer for the most up-to-date views from the IRS.

 

[redfishsc]

Thanks Lou, that pretty much answers the question.

We do use a professional to do our taxes. He also handles a lot of other small in-house type businesses (folks that sell stuff like cosmetics and other things), and this is (at least superficially) similar. He said a lot of his clients carry inventory from one year to the next.

At the moment I'm doing things as a cash-basis, as you say. I'm too busy with classes at the seminary to pursue a more busy penturning schedule (ie, going to shows, etc..) and I basically make pens as they are ordered, mostly via word of mouth. That still adds up to a lot of pen orders, lol.

 

[Russianwolf]

You'll need a Schedule C basically from the time you started through to current.

Included in schedule C is an inventory tracking (amounts only, not very detailed), so you need to have it for each year that you spend money on supplies and sell goods so that you are able to get a cost of goods sold amount to reduce your gross profits by.

I've never heard of having to pay taxes on inventory of this type however (and there is nothing on Schedule C or the 1090 regarding it). The amount, if so, would be rather minuscule I would wager. Just think of the Inventory tax that Wal-mart would be required to pay if its of any real percentage.

 

[redfishsc]

Great advice.


Up until now we've done everything out of our main checking account, but between this and the other side work I do, I may actually just start a new checking account and keep it all totally separate.


So, if I wanted to start using an inventory for tax purposes, I could start this year (ie, for my 2010 tax return 1 year from now).

Is there anything I should do right now to keep prepared for this, or do I just wait until January 2011 to take the first inventory to start claiming material cost on things that rolled over from 2010?

 

[Russianwolf]

the way the schedule C work, you just need to track you receipts when you purchase materials. Then you will figure the value of the inventory you have left over at the end of the year (including the materials in your finished inventory). The cost minus the year end inventory value will give you the cost of goods sold.

I track all mine in a simple excel spreadsheet. I put values on everything I buy so that the totals match the receipts. As I use them, I move materials to a different tab with finished pens, so each pen has the appropriate value. And I track my sales on that same tab. So all the info is easily tracked.

 

[redfishsc]

That sounds like a great idea.


What I fear however is tracking the cost of all the minutia of pen kits and prices. For example, I sell 4 different options on the Baron (chrome, gold ti, black ti, and copper). They are all a different price. At different times of the year (they vary). For different quantities. From different suppliers.

So, do you just have a general term "Baron fountain pen", and estimate the value of them all approximately the same (say, $12 per kit)? How nit-picky should I be in tracking these, especially when the price varies a lot.


Same with blanks.


I guess what I'm saying is that, in the event of something stupid like an audit, I want to be sure I've kept records appropriately.

Are estimated values on individual items OK so long as they add up to the total expenses at the end of the year?

 

[its_virgil]

I think the OP was referring to local business taxes that businesses pay on their inventory...as property taxes. Car dealers, appliance dealers have "inventory reduction" sales to lower the inventory when its time to report to the local tax collecting agency....much like most of pay property taxes on our home and other property. I could be wrong...have been before and will be again.

I get a (local)form to fill out to report inventory and business property and pay a small tax on my small pen making tools and supplies. I suspect the tax paid by other businesses with large inventories to be treated the same.

Do a good turn daily!
Don

I've never heard of having to pay taxes on inventory of this type however (and there is nothing on Schedule C or the 1090 regarding it).

 

[PenMan1]

I'd amend my 2008 return, set up a business up as an LLC or Sub-S corp (not a sole propietership or partenership) and hire a decent accountant that can set up your books on with accrual accounting. They way inventories, losses, etc carry over form year to year. If you sell a LOT of pens, being on a cash accounting system is costing you tremendously. The down side is you must report all sales (no sticking the cash sales at shows in your pocket) and in Georgia, sales tax tracking is EXTREMELY important.

 

[redfishsc]

I think the OP was referring to local business taxes that businesses pay on their inventory...as property taxes. Car dealers, appliance dealers have "inventory reduction" sales to lower the inventory when its time to report to the local tax collecting agency....much like most of pay property taxes on our home and other property. I could be wrong...have been before and will be again.

I get a (local)form to fill out to report inventory and business property and pay a small tax on my small pen making tools and supplies. I suspect the tax paid by other businesses with large inventories to be treated the same.

Do a good turn daily!
Don

That's it, Don.


Thanks for the help everyone!

 

[Daniel]

As for the paying taxes on any inventory. Some states do not do this. and it is actually a legal and common practice to ship your inventory to one of those states when you do your taxes (if it is worth it that is) Nevada does not tax inventory so California trucks all sorts of stuff over hear every year. I am not sure it would be worth boxing up all your pens and mailing them to a different state and then having them mailed back a few days later or not. but it is at least one idea. As for me I take such a huge loss on pens every year I don't even bother when it comes to taxes. I do have receipts to show my expenses and sales if the question ever does come up.

 

[Russianwolf]

That sounds like a great idea.


What I fear however is tracking the cost of all the minutia of pen kits and prices. For example, I sell 4 different options on the Baron (chrome, gold ti, black ti, and copper). They are all a different price. At different times of the year (they vary). For different quantities. From different suppliers.

So, do you just have a general term "Baron fountain pen", and estimate the value of them all approximately the same (say, $12 per kit)? How nit-picky should I be in tracking these, especially when the price varies a lot.


Same with blanks.


I guess what I'm saying is that, in the event of something stupid like an audit, I want to be sure I've kept records appropriately.

Are estimated values on individual items OK so long as they add up to the total expenses at the end of the year?

If I buy 10 Barons of different platings, I track 10 barons of different platings. The amount of the 10 barons will equal the amount on the receipt (including shipping and taxes). It may be nitpicky, but the auditor will be 10 times so I think.

 

[Russianwolf]

I think the OP was referring to local business taxes that businesses pay on their inventory...as property taxes. Car dealers, appliance dealers have "inventory reduction" sales to lower the inventory when its time to report to the local tax collecting agency....much like most of pay property taxes on our home and other property. I could be wrong...have been before and will be again.

I get a (local)form to fill out to report inventory and business property and pay a small tax on my small pen making tools and supplies. I suspect the tax paid by other businesses with large inventories to be treated the same.

Do a good turn daily!
Don

Ah, I live in WV and the only property they want to know about is livestock, houses and cars (and dogs believe it or not).

 

[ed4copies]

To set up a small business, you are VERY WELL ADVISED to find an accounting firm you trust. After you have done the taxes with their help for a few years (IF you actually participate in doing them, not just answer questions and blindly file), you may understand them enough to do it yourself. But setting up the initial return is, IMO, asking for trouble.

Beginning inventory+purchases-ending inventory=COGS

You MUST understand that, before you can file. IF it's unclear, hire help.