Entering zeroes for both starting and ending inventory on Schedule C?

[nextlevelminerals]

I've seen a little bit of debate on the dicussion board regarding how to fill out the Cost of Goods Sold portion of the Schedule C.  Some people have said that they simply enter 0 every year for both their starting and ending inventory.  I'm looking into starting an ebay business and I'd like to use this method.  Is it acceptable and commonly used?  I can't for the life of me seem to find any leads or further conversations online beyond one discussion on this forum.

[comics-scifi-collectibles]

Since tax laws very by state I would talk to an accountant.  

[nextlevelminerals]

I'm talking about my federal return and Schedule C which is a federal tax document.  

[mr_lincoln]

@nextlevelminerals  What "method" are you talking about for valuing your inventory at ZERO?  Keep in mind if you have inventory you purchased then it has value above zero AND it is an expense deduction, which by the way reduces your profit number which by the way reduces your tax burden. 

What I suggest you do is download the Schedule C or CZ and do a mock return with nice round numbers in all the areas.  Keep in mind you have deductions like mileage driven (53.5 cents per mile for 2017) for the business to the post office, to pick up packaging supplies or inventory, etc.  Then you have material costs, shipping costs for labels you pay are an expensed deduction, etc, etc.

If you change the inventory number UP or DOWN it will affect the profit which you are actually taxed on.   It is totally possible that in year #1 you may wind up showing a loss and not owe taxes on the sales, it just depends on how all the numbers pan out.

[nextlevelminerals]

I've read that many people simply enter zeroes for beginning and ending inventory every year so that they don't have to actually keep an inventory and they can calculate their costs/profit on an individual item basis.  My understanding is that this is a legally-accepted practice by the IRS, although only in certain situations.    

Post # 2 on this thread discusses this briefly: https://community.ebay.com/t5/Archive-Selling/I-need-help-with-tax-forms-re-INVENTORY/td-p/23850455

and this thread hits it in more depth: http://community.ebay.com/t5/Archive-Selling/reporting-income-to-irs/m-p/23827268/highlight/true#M48...

[pantlandia]

State or Federal, regardless, you really should be consult an accountant. Wouldn't you rather get the actual information rather hope that some random person on the internet who does not have your best interest at heart is possibly doing their taxes correctly?

[nextlevelminerals]

Surely.  I plan on consulting with an accountant eventually.  I'd like to get my ducks in a row and get some things established and researched before I do so, though.  More than anything, I'd like to know what to call the practice so I can do some research.  I remember finding some info on it a while back when I did some searching and now I can't find what I'm looking for.  I'm really trying to have a straighforward scenario prepared with some model books set up and a plan before I go and sit down and pay someone for their time.  

[partial*eclipse]

I have filed Schedule C almost every year since 1976.  I have been audited by the IRS 4 times, and by my state 4 times within the past 7 years.  I always enter zeroes for inventory, and nobody has ever objected to that. (The only time I ever owed anything was around 1980, when I accidentally subtracted something when I should have added.)

[nextlevelminerals]

Ultimately, I'm looking for some info, perhaps just a search term or two, which will help me shed more light on the subject, particularly as it pertains to ebay sales.  

[nextlevelminerals]

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@partial*eclipse wrote:

I have filed Schedule C almost every year since 1976.  I have been audited by the IRS 4 times, and by my state 4 times within the past 7 years.  I always enter zeroes for inventory, and nobody has ever objected to that. (The only time I ever owed anything was around 1980, when I accidentally subtracted something when I should have added.)

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So, just to be clear, your four audits weren't related to the practice of entering zeroes?  (And, I'm sorry that you've endured so many audits over the past few years.)  

[the*dog*ate*my*tablecloth]

You are looking at the form when you should be considering the type of accounting. There is cash accounting and accrual accounting. You choose one or the other and go with it. I use accrual since I carry an inventory every year.

You should investigate how the types of tax accounting work rather than going at it by what goes on the form. There are resources out there offered by the federal government for small sellers.

[partial*eclipse]

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@lorock0 wrote:

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 ... your four audits weren't related to the practice of entering zeroes?  (And, I'm sorry that you've endured so many audits over the past few years.)  

Nope, nobody has ever said anything about it, even though I have been asked to explain or justify all sorts of other things.

These state audits have sometimes been at the colonoscopy level -- even having to send in photocopies of our Social Security cards!  Every time!  I figure there's some red-flag formula that my particular numbers must be setting off.  

[mmadigan]

You may want to read this person's point of view

http://notyourdadscpa.com/can-i-expense-inventory-when-i-purchase-it/

His explanation of - "One of the most misunderstood concepts out there involves how to account for inventory costs. What is cost of goods sold? Do I have to calculate it?"

[southern*sweet*tea]

I have always used zeros. 98% of my inventory comes at no cost to me, so I truly have (practically) no inventory costs. 

[gramophone-georg]

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@lorock0 wrote:

I've seen a little bit of debate on the dicussion board regarding how to fill out the Cost of Goods Sold portion of the Schedule C.  Some people have said that they simply enter 0 every year for both their starting and ending inventory.  I'm looking into starting an ebay business and I'd like to use this method.  Is it acceptable and commonly used?  I can't for the life of me seem to find any leads or further conversations online beyond one discussion on this forum.

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It's acceptable if you run a business in which you buy inventory as your customers need it, for example in my auto restoration biz I buy parts and supplies on an as- needed basis when I know they will be used up on a job. Aside from a drop- shipping eBay business, though, I wouldn't think this would apply if you are buying inventory for eventual sale, and therefore carry some inventory over from one year to another.

As suggested, consulting a tax professional is your best bet. Here are the IRS instructions for Schedule C:

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Part III on page C-14 is specific to your question.

Hope this helps.