This may sound stupid to most of you but I have a question.

If you start a business and spend $10,000 to purchase inventory for resale and do not have any of it sold by the end of the year, would your business show a net loss for the $10,000 you spent out of pocket? I plugged some numbers into schedule C on Turbo Tax and it just shows 0 profit, not a loss. Is that correct?

It's not considered a loss because you still have it and could still sell it later.

Your goal now is to get rid of it before the end of the year.


Diane

The business writer who helps people grow their small business
http://www.BouncePublishing.com

It depends. If you expense your inventory, as you would most likely do if you do your taxes on a cash basis (as most small businesses do), you would show a loss. If you carry your inventory as an asset, as you would do if you do your taxes on an accrual basis (typical of a large corporation), you would show you books as still having/owning that value, hence no loss.

Thanks for the replies.

I was plugging hypothetical numbers in the schedule C in TurboTax and you are right. If your beginning inventory is $3000, and you have no sales, your year ending inventory is $3000, then it calculates a net loss of $3000. I think I understand now. If you start a new business this month and have a starting inventory of $3000, that is what you would put in the box for inventory at beginning of year. If I am wrong on anything, please let me know. Thanks for all your help!

Hmmmm another angle you could try is to claim depreciation on the merchandise (if applicable) A good example would be a new car that is on the lot past the end of the year. Worth less because its a year older. Just a thought.

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Well... If you are a small business (under 10 million average gross receipts) you do not have to account for inventory if you are using cash basis. That means that you do not use the inventory section on 1040 Sch-C, page 2, part III. Rather you show an appropriate expense for materials or whatever in 1040 Sch-C, page 2, part V. This then will give you your loss without mudding up the question of inventory on hand.

With regards to depreciation on merchandise (inventory), you don't depreciate merchandise that is held for sale. If you are recording inventory, your only option on merchandise is to sell it, mark down to fair market value if less than cost, or write it off as obsolete. If you don't use part III and instead use part V, you have expensed (write-off) the merchandise so there is no more accounting for it. It is done and gone as far as your books and tax return is concerned so when you do sell it you will have 100% income with no deduction in that year of sale.

So maybe it is better to call it inventory this year (part III) with zero loss and take the deduction or cost write-off when you actually sell it. The IRS likes the inventory method better and can actually reclassify it as inventory disallowing your loss if they can show that it causes your income to not be reflected properly (not likely that they would do that in a small $ case unless you are audited).

my 2???

Hmmm... my inventory didn't count as a loss for me when my tax attorney did my S Corp taxes for last year, and that was the explanation he gave me. I'm on the cash basis.


Diane

The business writer who helps people grow their small business
http://www.BouncePublishing.com

If you call your purchase "inventory" it is not expensed until you sell it and the expense is call cost of goods sold resulting in a net profit of the sale. This is true if cash basis (with inventory) or accrual basis.

If you call your purchase "expense" it is expensed against any income of the period regardless of when the purchased items are sold. Thus, if you have no sales you would have a loss.

Hmmm... you actually use an attorney to do taxes. You are really brave.

In Microsoft Money 2005 Small Business, I purchased $3000 worth of items from my checking account and categorized it as "Cost of Goods Sold". I then entered all individual inventory items with the base cost (totaling the $3000 I just spent, and showing $3000 worth of total inventory). Then I had $700 advertising, and no sales. When I do the P&L report, it indeed shows a net loss of ($3,700). And the same number when you run Money's schedule C report.

Does this all sound right or am I missing something?

"Cost of goods sold" is an expense account and "advertising" is an expense account so they add together to report a loss. Now, Inventory account is not an expense account so if you record inventory you have an asset until you sell it and zero out the inventory to the "cost of goods sold" account (an expense account) to match the income to show a matched income and expense called net income or net profit.

I will say it again. You don't record inventory (anywhere but maybe on a scratch pad) on the books if you want cash basis accounting without inventory, which gives you a write-off / loss for the purchase in the year of the purchase.

If you want to match, in the same year, the purchase expense to the income received you use an inventory account (an asset account just like your cash account or truck account) and expense it to cost of good sold when you sell the merchandise.

In your MS Money you must have an extra $3,000 somewhere for your double booking of the same thing. Its probably on your balance sheet. Your P&L can't possible be correct if your balance sheet is not correct so always look at the balance sheet and say does this look right.

wheeeeee!