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| | | Author: | milwaukee  | | Posted: | Mar 7, 2022 09:48 | | Subject: | US taxes, change from cash to accrual | | Viewed: | 154 times | | Topic: | General | |
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| Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
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| | | | | Author: | Cob | | Posted: | Mar 7, 2022 13:09 | | Subject: | (Cancelled) | | Viewed: | 51 times | | Topic: | General | |
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| | (Cancelled) |
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| | | | | Author: | Cob | | Posted: | Mar 7, 2022 13:11 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 62 times | | Topic: | General | |
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| In General, milwaukee writes:
| | Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
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If your company revenue is under $25,000,000 you can elect either cash of accrual.
Likely cash will be the best option for a Bricklink store.
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| | | | | | | Author: | Cob | | Posted: | Mar 7, 2022 14:38 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 65 times | | Topic: | General | |
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| In General, Cob writes:
| | In General, milwaukee writes:
| | Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
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If your company revenue is under $25,000,000 you can elect either cash of accrual.
Likely cash will be the best option for a Bricklink store.
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"cash or accrual" Sorry for the mistype.
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| | | | | Author: | CPgolfaddict | | Posted: | Mar 7, 2022 22:33 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 90 times | | Topic: | General | |
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| I doubt it was ever OK to fully deduct the purchase price of inventory in the
year purchased. The ONLY way this makes sense to me is if you do NOT have a
year over year increase in the cost of on-hand goods. e.g. if you sold everything
in the same year you bought it. That would work.
e.g. figure out my profit on Dec 15th, then buy more goods before year end (and
not sell them) and then pay no US income taxes that year. Everyone would do
this every year! I know I would if it was legal.
With the cash method you need to account for your cost of on hand inventory at
the end of the tax year. If your on hand inventory cost level goes up year-over-year,
you can't claim the year-over-year increase as part of Cost of Goods Sold
for that year.
With the accrual method you recognize both cost of good sold and revenue at the
time you sell the item. So again you can't wipe out profit by buying inventory
right before the year end.
PS...when I started I didn't keep good track of cost per lot. So I did a
coefficient/percentage estimate. I really didn't have any other choice.
Once I realized the error of my ways, I started tracking per item, per lot.
I use the cost field in BL. Let the BL upload "Qty average cost" feature do
it for you. FYI... I still have a handful of very old items where I estimate
the cost using the same method from that first year.
In General, milwaukee writes:
| | Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
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| | | | | | | Author: | Cob | | Posted: | Mar 7, 2022 23:25 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 61 times | | Topic: | General | |
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| If you are giving tax advice and you have to start the statement with "I doubt",
I suggest not giving tax advice.
The cash method is just that, you can deduct what is paid in cash. You can even
deduct the items you paid for in cash and have not received in hand (it is called
prepaids). If you elect the cash method you can deduct 100% of your inventory
purchases in the year that the cash was spent. Inventory includes, LEGO, packaging,
envelopes, and other supplies.
A common practice in farming is to pay for the seed in December for what will
be planted the next spring. The seed dealer will not deliver the seed until
the spring and the farmer will take the tax deduction a year early.
Cob, CPA (Certified Public Accountant)
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| | | | | | | | | Author: | milwaukee | | Posted: | Mar 7, 2022 23:34 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 67 times | | Topic: | General | |
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| Thank you!
What is your opinion about this 2021 clarification for TCJA that many interpret
that if there any electronic records of inventory exist then that inventory cannot
be deducted as part of cash method and has to be appropriately declared when
filing taxes?
In General, Cob writes:
| | If you are giving tax advice and you have to start the statement with "I doubt",
I suggest not giving tax advice.
The cash method is just that, you can deduct what is paid in cash. You can even
deduct the items you paid for in cash and have not received in hand (it is called
prepaids). If you elect the cash method you can deduct 100% of your inventory
purchases in the year that the cash was spent. Inventory includes, LEGO, packaging,
envelopes, and other supplies.
A common practice in farming is to pay for the seed in December for what will
be planted the next spring. The seed dealer will not deliver the seed until
the spring and the farmer will take the tax deduction a year early.
Cob, CPA (Certified Public Accountant)
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| | | | | | | | | Author: | cosmicray | | Posted: | Mar 8, 2022 11:03 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 69 times | | Topic: | General | |
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| In General, Cob writes:
| | If you are giving tax advice and you have to start the statement with "I doubt",
I suggest not giving tax advice.
The cash method is just that, you can deduct what is paid in cash. You can even
deduct the items you paid for in cash and have not received in hand (it is called
prepaids). If you elect the cash method you can deduct 100% of your inventory
purchases in the year that the cash was spent. Inventory includes, LEGO, packaging,
envelopes, and other supplies.
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Which sounds, like you would then carry the inventory as having a zero dollar
basis value, yes ? It would, in later years, cause the COGS to be reduced.
While that might have some advantages, I'm not sure I like that way of counting
things.
Nita Rae
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| | | | | | | | | Author: | CPgolfaddict | | Posted: | Mar 9, 2022 23:17 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 51 times | | Topic: | General | |
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| Hmm. So as long as my store grows enough every year, I never have to pay US
income taxes when I buy enough inventory at the end of the year to offset my
profit that same year?
In General, Cob writes:
| | If you are giving tax advice and you have to start the statement with "I doubt",
I suggest not giving tax advice.
The cash method is just that, you can deduct what is paid in cash. You can even
deduct the items you paid for in cash and have not received in hand (it is called
prepaids). If you elect the cash method you can deduct 100% of your inventory
purchases in the year that the cash was spent. Inventory includes, LEGO, packaging,
envelopes, and other supplies.
A common practice in farming is to pay for the seed in December for what will
be planted the next spring. The seed dealer will not deliver the seed until
the spring and the farmer will take the tax deduction a year early.
Cob, CPA (Certified Public Accountant)
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| | | | | | | | | | | Author: | wildchicken13 | | Posted: | Mar 10, 2022 00:03 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 36 times | | Topic: | General | |
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| In General, CPgolfaddict writes:
| | Hmm. So as long as my store grows enough every year, I never have to pay US
income taxes when I buy enough inventory at the end of the year to offset my
profit that same year?
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If you are spending all of your profit, then you are not really making money,
no? I thought the whole point of running a business was to make a profit.
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| | | | | | | | | | | Author: | CPgolfaddict | | Posted: | Mar 10, 2022 00:18 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 49 times | | Topic: | General | |
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| Turbo tax home and business has been asking me for my year end inventory value
every year since I started selling on BL. I've been using the cash method
all along. I've never seen anything that appears to co-opt this: "....must
still use a method of accounting for inventory that clearly reflects income"
But I suppose I could have missed it. I've been planning on using a tax
pro this year anyway... we'll see if I missed an opportunity in prior years.
whether Accrual or cash if I start a new business:
1. Starting from $0 of inventory I buy $10K in goods for resale.
2. Sell 75% of those goods for $12K
Accrual...you can only recognize a cost of $7.5K since you recognize cost at
the time the item is sold so the profit is $12K - (75% * $10K) = $4.5K.
With cash method I wind up in the same place. At least in Turbo Tax....I put
in $12K of revenue, $10K of COGS expenses. But I'm asked about inventory
levels... I need to report that my inventory rose from $0 to $2.5K (25% of the
$10K that is still on hand). COGS expense is then reduced from $10K to $7.5K
and I wind up back at the same $4.5K profit.
"non-incidental materials & supplies" looks just like inventory to me with effectively
the same approach. What am I missing?
In General, CPgolfaddict writes:
| | Hmm. So as long as my store grows enough every year, I never have to pay US
income taxes when I buy enough inventory at the end of the year to offset my
profit that same year?
In General, Cob writes:
| | If you are giving tax advice and you have to start the statement with "I doubt",
I suggest not giving tax advice.
The cash method is just that, you can deduct what is paid in cash. You can even
deduct the items you paid for in cash and have not received in hand (it is called
prepaids). If you elect the cash method you can deduct 100% of your inventory
purchases in the year that the cash was spent. Inventory includes, LEGO, packaging,
envelopes, and other supplies.
A common practice in farming is to pay for the seed in December for what will
be planted the next spring. The seed dealer will not deliver the seed until
the spring and the farmer will take the tax deduction a year early.
Cob, CPA (Certified Public Accountant)
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| | | | | | | | | | | | | Author: | peregrinator | | Posted: | Mar 10, 2022 07:16 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 41 times | | Topic: | General | |
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| In General, CPgolfaddict writes:
| | Accrual...you can only recognize a cost of $7.5K since you recognize cost at
the time the item is sold so the profit is $12K - (75% * $10K) = $4.5K.
With cash method I wind up in the same place. At least in Turbo Tax....I put
in $12K of revenue, $10K of COGS expenses. But I'm asked about inventory
levels... I need to report that my inventory rose from $0 to $2.5K (25% of the
$10K that is still on hand). COGS expense is then reduced from $10K to $7.5K
and I wind up back at the same $4.5K profit.
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I believe this is correct. You can deduct what you spend on inventory BUT you
still have to report the value (what you spent on it, not what you've listed
it for) of your unsold inventory at the end of the year as if it were revenue.
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| | | | | | | | | | | | | Author: | Cob | | Posted: | Mar 10, 2022 10:33 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 32 times | | Topic: | General | |
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| My apologizes, I am incorrect. I am very sorry for the confusion.
I read a line of the IRS tax publication backwards.
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| | | | | | | | | Author: | Cob | | Posted: | Mar 10, 2022 10:33 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 34 times | | Topic: | General | |
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| My apologizes, I am incorrect. I am very sorry for the confusion.
I read a line of the IRS tax publication backwards.
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| | | | | | | Author: | milwaukee | | Posted: | Mar 7, 2022 23:27 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 51 times | | Topic: | General | |
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| I agree, my inventory is slowly growing. It seems like before it was ok to expense
it with TJCA, inventory was just taxed when eventually it was geting sold.
But now the part that is inventoried is supposed to be reported.
I have no idea how to track the cost of used parts. I do not inventory every
single bulk lot in full- I have at least one or two pre-sorting stages where
things accumulate until they need to be either sorted further or inventoried.
For example inventorying of simple bricks is happening every couple of months,
but used technic or wheels maybe once a year or two.
In General, CPgolfaddict writes:
| | I doubt it was ever OK to fully deduct the purchase price of inventory in the
year purchased. The ONLY way this makes sense to me is if you do NOT have a
year over year increase in the cost of on-hand goods. e.g. if you sold everything
in the same year you bought it. That would work.
e.g. figure out my profit on Dec 15th, then buy more goods before year end (and
not sell them) and then pay no US income taxes that year. Everyone would do
this every year! I know I would if it was legal.
With the cash method you need to account for your cost of on hand inventory at
the end of the tax year. If your on hand inventory cost level goes up year-over-year,
you can't claim the year-over-year increase as part of Cost of Goods Sold
for that year.
With the accrual method you recognize both cost of good sold and revenue at the
time you sell the item. So again you can't wipe out profit by buying inventory
right before the year end.
PS...when I started I didn't keep good track of cost per lot. So I did a
coefficient/percentage estimate. I really didn't have any other choice.
Once I realized the error of my ways, I started tracking per item, per lot.
I use the cost field in BL. Let the BL upload "Qty average cost" feature do
it for you. FYI... I still have a handful of very old items where I estimate
the cost using the same method from that first year.
In General, milwaukee writes:
| | Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
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| | | | | Author: | unrulycharms | | Posted: | Mar 8, 2022 01:05 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 54 times | | Topic: | General | |
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| In General, milwaukee writes:
| | Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
|
I agree with you, cash basis is no longer allowed, even for a small business
under 26M. Check out this article that lays out choices near the bottom https://loopholelewy.com/loopholelewy/01-tax-basics-for-startups/accounting-methods-04-nonincidental-materials-supplies.htm
I think it sounds totally reasonable to use your "for sale" value as a means
to derive the "asset" value for the calculation. Really you just need to document
and compare the year over year change and make an adjustment to reduce deductible
expenses as needed. If the value is the same, you sold all you bought that year,
no adjustment. If the value grows
so has the value of your unsold asset, reduce your expenses. That's a good
catch, I bet a lot of people were planning on cash method again.
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| | | | | | | Author: | CPgolfaddict | | Posted: | Mar 11, 2022 20:11 | | Subject: | Re: US taxes, change from cash to accrual | | Viewed: | 26 times | | Topic: | General | |
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| Cash method should be allowed IF you handle inventories. -- https://www.irs.gov/publications/p538
In General, unrulycharms writes:
| | In General, milwaukee writes:
| | Hi,
Is there any consensus about how to report taxes this year?
Before due to fuzziness of TCJA (Tax Cuts and Jobs Act) it was possible to fully
deduct inventory purchases.
But due to update from 2021 (https://www.govinfo.gov/content/pkg/FR-2021-01-05/pdf/2020-28888.pdf)
as long as there is some inventory tracking exists ("their books and
records") we are supposed to switch to accrual method.
What is acceptable way to track inventory capital costs? With the heavy mix of
used bulk Lego which goes through many presorting and merging stages tracking
of individual part cost is not really possible. Would it be acceptable to use
"for sale" price of inventory in BL with some estimated coefficients for estimated
cost/price for main categories like minifigs/used parts/new parts?
|
I agree with you, cash basis is no longer allowed, even for a small business
under 26M. Check out this article that lays out choices near the bottom https://loopholelewy.com/loopholelewy/01-tax-basics-for-startups/accounting-methods-04-nonincidental-materials-supplies.htm
I think it sounds totally reasonable to use your "for sale" value as a means
to derive the "asset" value for the calculation. Really you just need to document
and compare the year over year change and make an adjustment to reduce deductible
expenses as needed. If the value is the same, you sold all you bought that year,
no adjustment. If the value grows
so has the value of your unsold asset, reduce your expenses. That's a good
catch, I bet a lot of people were planning on cash method again.
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USA, Wisconsin
