Cost of Goods sold for small business

[jillp]

I have been in business for a few years, but always only doing services
(graphic design and illustration.) This year I began selling products to
consumers (all art and design related under the same business umbrella).

I'm confused by the Cost of Goods Sold area on the schedule C and the rules
for qualifying small business exempt from taking inventory- and what that
even means!

My products are generally made to order, so most of the cost is just paying to
outsource printing for each order I have. However, I also keep a VERY small
inventory of a few items such a ribbons, giftwrap, stretcher bars for canvases,
etc. I bet I have about $200 worth of this stuff on hand.

Would this be correct?

Line 35- $0
Line 36- All printing and misc supply purchases less personal use
Line 41- Estimate of what is leftover

OR do I not even need to estimate line 41 and just deduct everything I purchased this year, including the small amount of stuff I have leftover?

Thanks for your help! -Jill

[oceanlovin'ea]

Jill,
May I suggest since your tax return is becoming more complicated that you look for a competent tax professional to help you.
An enrolled agent is a good place to start. You can go to www.naea.org and look for an enrolled agent in your city.

An enrolled agent is a person who is licensed to practice before the IRS and they are very competent in tax knowledge.

Linda F

[jillp]

Thanks- I thought someone here would have a simple answer. I understand every other aspect of my taxes so I don't feel the need to pay a professional. I'm a very small business (gross under 15k) and a sole proprietor with no employees.

From everything I have found elsewhere on these boards, it looks as though I am correct to put this under COGS and show a small remaining inventory. But if anyone has any comments otherwise I'd love to hear it!

[Zee]

Originally Posted by jillp

I have been in business for a few years, but always only doing services
(graphic design and illustration.) This year I began selling products to
consumers (all art and design related under the same business umbrella).

I'm confused by the Cost of Goods Sold area on the schedule C and the rules
for qualifying small business exempt from taking inventory- and what that
even means!

My products are generally made to order, so most of the cost is just paying to
outsource printing for each order I have. However, I also keep a VERY small
inventory of a few items such a ribbons, giftwrap, stretcher bars for canvases,
etc. I bet I have about $200 worth of this stuff on hand.

Would this be correct?

Line 35- $0
Line 36- All printing and misc supply purchases less personal use
Line 41- Estimate of what is leftover

OR do I not even need to estimate line 41 and just deduct everything I purchased this year, including the small amount of stuff I have leftover?

Thanks for your help! -Jill

Yes, what you're doing is correct just include the inventory for sale ($200) and anything else leftover that remains usable. If it's unusable, add it to the cost.

[jillp]

Thanks. That was what I thought was right.

I have a few CPAs from other boards saying that because I make so little I don't need to keep inventory at all, and can just include it all as purchases and show a remaining inventory of zero.

Honestly, it's such a small amount of money that it's not going to affect what I owe this year by much. Big deal if I pay taxes on $200 more profit this year and have the deduction next year. I just want to make sure am doing to RIGHT thing so as not to be raising flags.

[Zee]

Originally Posted by jillp

Thanks. That was what I thought was right.

I have a few CPAs from other boards saying that because I make so little I don't need to keep inventory at all, and can just include it all as purchases and show a remaining inventory of zero.

Honestly, it's such a small amount of money that it's not going to affect what I owe this year by much. Big deal if I pay taxes on $200 more profit this year and have the deduction next year. I just want to make sure am doing to RIGHT thing so as not to be raising flags.

You're welcome. Showing the $200 as inventory is the correct way. However, the other CPA's are just being practical. $200 is a very minimal amount of money, and it's doubtful it would raise any questions.