Confused about taxes, COGS, reciept keeping and things along that line

[whimsically_mad34]

At the beginning of this year I did some research on what I would need come tax season since I planned on using ebay to make a decent side income. After my research I made an excel sheet and started listing like crazy and tracking all of my sales and expenses as I thought i needed to from my research. These are the things I track, all were done as a total per day so if I had 3 sales i would add them all together and they were on one line a line for sales for the 1st of Jan and so on, then each month had its own tab:

Amount paid by buyer to me(Sales)

Amount paid for shipping 

Inventory buys

Misc Buys

Paypal Fee

Ebay Fees

At the time I made the spreadsheet I was under the assumption, based off what I read, that I could claim all my inventory buys as expenses. For some reason I started reading about it again today and it seems like that assumption might have been wrong. From what I have been reading today it seems like I can only claim the expenses for items that have sold, COGS.

I understand the basic Idea behind it. I buy 10 items and only 5 sell this year so I only get to claim the cost of the 5 that sold this year. Then if the other 5 sell next year I claim their costs then. I guess the main thing I am confused about is how to keep the records doing it that way. Say I go to a thrift store and buy 50 items for 50 dollars, do I count them all as 1 dollar per COGS when they sell, or do i need to put their cost as they are on the receipt? Then how would you prove if asked to show proof what reciept one of those 50 items came off of? Do you number your reciepts and reference that number in your record keeping? What about when one or two of those 50 items sells in 2 years?

So is the first way i thought I could do it indeed the wrong way and do i need to switch to the COGS way? If so do you have any advice in how to set up my excel and how to organize receipts? Also I  now have 6 months of receipts of inventory buys and 1000 items listed and i have no clue what receipts they go to our what theor COGS would be when they sell.

Am i just way over thinking this? My head is hurting thinking about it and I just want to get it straightened out now if I need to. Any advice/info would be truly appreciated!! If i left something out or was too scatterbrained let me mnow and i will try to clear it up!

[the*dog*ate*my*tablecloth]

COGS used to be required for businesses who carried an inventory. Now I believe if you sell below a million a year you can use cash basis and just expense what you buy.

My accountant filed some form for 2018 to switch me over and I got enough back in taxes to buy a car. I will have fewer expenses to claim going forward though because I’m not buying much any more

[richard1rst]

COGS is easy to figure:

Beginning inventory value Jan 1 this year                                 $       xx.xx

plus      Purchases throughout the year`                       +          $       xx.xx

minus   Inventory value Jan 1 next year`                        --         $        xx.xx

that total equals COGS                      

You do not need to take the time to book the cost of each individual item, sold. Simply keep track of how much money you spend for inventory. Doesn’t even matter to keep track of how many of any item you sold. It all comes out in the above calculations.

[whimsically_mad34]

Thank you for your response! I do believe it is simple but I think I am just missing something that will connect the dots for me.  I saw it explained this way somewhere but I didn't really know how to figure it out this way either.

Is the value the cost you paid for the item or what the item will sell for? 

If it is what you paid for the item then how would you know your ending value if you didnt track the COGS for each item sold through the year.

So I start at zero beginning inventory and spend $2000 throughout the year on goods. How do I know my value of goods on Jan 1st next year to subtract? Say I still had 1000 items listed I would still need to know what I paid for those 1000 items individually and add it up to get my value right?

Os ir there a much simpler way that is obvious that I am missing? And Im still confused how you would prove that through your receipts if you were ever asked also.

Thank you for any help it is seriously very appreciated!

[trukur_0]

Your best bet is to talk to a CPA, we're not tax experts and even if one of us is we have no skin in the game (meaning if things go south you're going to take full responsibility), so go talk to a CPA.

[richard1rst]

Is the value the cost you paid for the item or what the item will sell for? 

Inventory value us exactly what you paid for it. It is irrelevant what you intend to sell it for.

then how would you know your ending value

You do an inventory count and apply the cost per unit to the inventory count. If you bought 2000 items at $10 each ($20,000) and you still have 1000 left then, at $10 each, the ending inventory value is $10,000. Now obviously through out the year you are going to buy different items at different costs. It is only necessary to know how much you paid per item and then apply that value to the number of remaining items. for example: 3 of these at $5, 12 of these at $7.50, 8 of these at $9, etc.

And Im still confused how you would prove that through your receipts if you were ever asked also.

You have an itemize invoice from whomever you bought whatever you bought. That is all the proof you need.

[pcobra93]

Just go to Wal Mart and buy a receipt book....you can write whatever you want for cost basis of any item.

[luckythewinner]

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From what I have been reading today it seems like I can only claim the expenses for items that have sold, COGS.

You should probably look at Publication 334 from the IRS and read up on the section about "Treating inventory as non-incidental material or supplies". Basically, if you sell less than $1 million a year, you can account for your inventory using cash basis by expensing the cost of each item you sell in the year you sell it. But that means you have to keep track of how much each item in your invetory cost. 

Say I go to a thrift store and buy 50 items for 50 dollars, do I count them all as 1 dollar per COGS when they sell, or do i need to put their cost as they are on the receipt?

You need to account for them using the actual cost of each item on the receipt.

If you bought a car for  $49,901 and 99 spark plugs for $1 each, the IRS would not like it if you kept the car for yourself and then sold the 100 spark plugs on eBay and claimed a $505 deduction for each of them 🙂

Also I  now have 6 months of receipts of inventory buys and 1000 items listed and i have no clue what receipts they go to our what their COGS would be when they sell.

If you can't tell which receipt goes with which item, how would the IRS be able to tell? Take your best guess, and from now on keep a log and track the COGS with each item.

One method might be to make a copy of the receipt for each item and circle the item cost, and then put that copy with the item in your invetory. Then when the item sells, you put the receipt copy in a "sold" file and total them up at the end of the year. 

[7606dennis]

You really need to consult a CPA or other tax professional about setting up your bookkeeping in a format acceptable to the IRS.  Quick Books is a popular program but I would get advice from the above mentioned accounting professionals to determine which program best suits your needs.

[mam98031]

COGS = Cost of Goods sold.

COGS does not represent inventory values.  It represents what it cost you to sell the products or service you sell.  Any expense that can be directly contributed to the single item you sell is the COGS for that item.  

For example:  the price you pay for the item, the FVFs for the sale of that item, the listing fees for the sale of that item, the fees you pay to have the payment processed, the shipping costs to ship that item, etc.

Similarly they are all the costs you should consider when you are developing your pricing / what you want to sell it for.  COGS is before any profit is tacked on.

[mam98031]

COGS are not the only costs that you can claim as expenses against your sales.  COGS are your direct costs, but then you have indirect costs too.  Ebay store fees, labor, computer expenses, office expenses, mileage, etc.

Keep all your receipts.  Put notes on them if it helps.  

Basically you start off with your total Sales - COGS = Gross Income - Indirect Costs = Net Income before taxes.

[mam98031]

Inventory is a separate issue.  

https://www.irs.gov/publications/p334

It can be complicated or easy.  I vote for easy.  So while reading through IRS stuff can easily be overwhelming. 

You need to decide if you are going to report your income on a CASH basis or ACCRUAL method.  Pick one and stick with it.  I use the Cash basis of accounting.  I write off my expenses in the year they come in.  

It may serve you best to find a local CPA that specializes in small online businesses and pay them to advise you for about an hour.  Let them guide you.  But get the correct advice so that it is easier on you.  Bring a notepad and just fire off your questions, they will be able to help you and give you examples.  It isn't that hard to keep our own books.  And it sure beats the added expense of paying someone to do it.

I do mine with a combination of Microsoft Access and Excel.  

[rpalma]

The beginning of year inventory "value" (based on prices you paid), current cost of inventory purchases this year minus the ending inventory "value" identifies the cost of inventory sold for the year.

If this is your first year, then the beginning inventory "value" is 0, the cost of inventory purchased this year is what you paid for your inventory, and the ending "value" is the purchase cost of inventory you have on hand at the end of the year.

You only need to track the cost of individual items such that you can identify the value of the items still in inventory at the end of the year.

You should be tracking your mileage as that is a major paper expense.

You need a log book (excel sheet is fine or paper log book) with starting mileage and ending mileage for each trip you take related to the business.

[7606dennis]

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@mam98031 wrote:

Inventory is a separate issue.  

https://www.irs.gov/publications/p334

It can be complicated or easy.  I vote for easy.  So while reading through IRS stuff can easily be overwhelming. 

You need to decide if you are going to report your income on a CASH basis or ACCRUAL method.  Pick one and stick with it.  I use the Cash basis of accounting.  I write off my expenses in the year they come in.  

It may serve you best to find a local CPA that specializes in small online businesses and pay them to advise you for about an hour.  Let them guide you.  But get the correct advice so that it is easier on you.  Bring a notepad and just fire off your questions, they will be able to help you and give you examples.  It isn't that hard to keep our own books.  And it sure beats the added expense of paying someone to do it.

I do mine with a combination of Microsoft Access and Excel.  

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If you maintain an inventory of products that carries over from year to year, I believe that the IRS requires you to use the accrual method of accounting.  How you set up your accounting initially is important since to change requires permission from the IRS.  For that reason I agree with Mam98031 and it is important to get advice from a qualified accountant or tax specialist when setting up your business accounting.  Some businesses require different accounting practices than others. 

[mam98031]

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@7606dennis wrote:

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@mam98031 wrote:

Inventory is a separate issue.  

https://www.irs.gov/publications/p334

It can be complicated or easy.  I vote for easy.  So while reading through IRS stuff can easily be overwhelming. 

You need to decide if you are going to report your income on a CASH basis or ACCRUAL method.  Pick one and stick with it.  I use the Cash basis of accounting.  I write off my expenses in the year they come in.  

It may serve you best to find a local CPA that specializes in small online businesses and pay them to advise you for about an hour.  Let them guide you.  But get the correct advice so that it is easier on you.  Bring a notepad and just fire off your questions, they will be able to help you and give you examples.  It isn't that hard to keep our own books.  And it sure beats the added expense of paying someone to do it.

I do mine with a combination of Microsoft Access and Excel.  

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If you maintain an inventory of products that carries over from year to year, I believe that the IRS requires you to use the accrual method of accounting.  How you set up your accounting initially is important since to change requires permission from the IRS.  For that reason I agree with Mam98031 and it is important to get advice from a qualified accountant or tax specialist when setting up your business accounting.  Some businesses require different accounting practices than others. 

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it is more relaxed than that for small businesses like most of us are.  There is a hybrid type way to use Cash Accounting w/ carrying an inventory.  I personally don't do that.  I stick with simple cash accounting.

But YES I absolutely agreed.  Paying a qualified CPA in online small businesses is money well spent.  Get your IRS rules as well as your state rules for reporting.  Time and money well spent.