Taxes

[retrogames10000]

Could someone explain how I should be keeping records for taxes?

How do I accurately give my cost of goods when I buy mixed lots?  For example today, I sold an item for $10 - it came in a lot of 35 mixed items, and it was one of the best items.  What cost of goods should I guess for this transaction? It does not seem accurate to me to just average out the cost between all 35 items when some items are clearly more expensive.  How do you handle this?

What should I be doing after each sale?  Should I be recording the transaction and cost of goods for each sale?

Thanks for your insight

[caldreamer]

You should create spreadsheet of all inventory bought & sold (running total...use same spreadsheet year after year).   Assign inventory# to all your items and when that item sells deduct "cost of goods" from inventory.  Your inventory spreadsheet should include (date of purchase, cost of goods, quantity, description, returned merchandise (add to cost of goods) when item sell subtract "cost of goods".   You need to know beginning "inventory on hand on" January 1st and "ending inventory on hand on" December 31.    Difference between "beginning inventory" and "ending inventory" is amount sold.

If you buy inventory in bulk (example:   5 items for $20).  You could assign each item "cost" of $4 or make single item with higher cost.   The important thing is that you have receipts to prove "cost of goods".

You also need to keep track of any business related expenses (mileage, office supplies, packing materials).  Anything related to your business is tax deductible (be sure to keep receipts).

EBAY has 1-page "easy to understand" report that shows QTD (sales, refunds, EBAY fees, shipping expense).   Go to PAYMENTS, REPORTS (click on REPORTS (NEW) .    You will need this information when you file your Federal income tax.

EBAY sends 1099 to you and the IRS.   You must report "gross income" (as shown on 1099) and then you deductible your business expenses (EBAY fees, returned merchandise, shipping labels, mileage, office supplies, packing materials, etc).   You pay Federal income tax on "net income" after all expenses are deducted.   You must file as a BUSINESS if you want to deduct "business expenses".

[chapeau-noir]

Tax information for eBay

Intuit has a good summary

[susanb1872]

You are correct that you should not just average the cost since it will make your gross profit wrong on individual items. You should use what's called the "relative sales value" method. Requires a little math and if you really needed an example I could post one later. 

[powell-memorabilia]

Most use cash based accounting.  The cost of that inventory you bought is an expense when you purchased it -  I need to waste your time assigning a COGS.

[dbfolks166mt]

     You can keep a spreadsheet for the items you purchased but the IRS is only interested in the big picture. I also purchase large lots and sometimes I split the cost sold out among a few items and zero out the COGS for those that remain. 

     It also depends on what type of accounting you utilize as to when and how you recognize expenses and revenues. I use accrual accounting so expenses are written off at the time they are purchased and revenues are recognized when the item is sold regardless of the cash flow. Accrual is the only method recognized by GAAP. All public companies must use accrual accounting.

     If you are using cash accounting it will be a bit more complicated since you recognize the expense and revenue based on the movement of the cash. This becomes an issue at the end of the year. If you purchase something with a CC in the middle of December or you sell something on eBay during the later part of the month it may or may not be an expense or revenue depending on when the cash flows. With your CC purchase you may not receive the statement until January of the following year and the cash may not actually be deducted from your bank until February. 

     With regards to inventory there is a small business exemption that saves a LOT of headache. There is a small business exemption with regards to keeping inventory. The following is from the IRS publication. 

Inventories

Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use an accrual method for purchases and sales of merchandise.

Exception for small business taxpayers.

 

If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine your cost of goods sold in Part III of Schedule C.

Small business taxpayer.

 

You qualify as a small business taxpayer if you (a) have average annual gross receipts of $27 million or less for the 3 prior tax years, and (b) are not a tax shelter (as defined in section 448(d)(3)). If your business has not been in existence for all of the 3-tax-year period used in figuring average gross receipts, base your average on the period it has existed, and if your business has a predecessor entity, include the gross receipts of the predecessor entity from the 3-tax-year period when figuring average gross receipts. If your business (or predecessor entity) had short tax years for any of the 3-tax-year period, annualize your business’ gross receipts for the short tax years that are part of the 3-tax-year period. See Pub. 538 for more information.

Treating inventory as non-incidental material or supplies.

 

If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid or incurred to acquire or produce the inventoriable items treated as non-incidental materials and supplies in the year in which they are first used or consumed in your operations. Inventory treated as non-incidental materials and supplies is used or consumed in your business in the year you provide the inventory to your customers.

Financial accounting treatment of inventories.

 

Your financial accounting treatment of inventories is determined with regard to the method of accounting you use in your applicable financial statement (as defined in section 451(b)(3)) or, if you do not have an applicable financial statement, with regard to the method of accounting you use in your books and records that have been prepared in accordance with your accounting procedures.

Changing your method of accounting for inventory.

 

If you want to change your method of accounting for inventory, you must file Form 3115, Application for Change in Accounting Method. See Change in Accounting Method, later.

Items included in inventory.

 

If you are required to account for inventories, include the following items when accounting for your inventory.

• Merchandise or stock in trade.

• Raw materials.

• Work in process.

• Finished products.

• Supplies that physically become a part of the item intended for sale.

Valuing inventory.

 

You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items.

Inventory valuation rules cannot be the same for all kinds of businesses. The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Your inventory practices must be consistent from year to year.

More information.

 

For more information about inventories, see Pub. 538.

[stainlessenginecovers]

When you bought that lot of 35 items; you knew what was valuable and what was not. Assign a 'cost' to each item separately and run with that number all the way through to the sale. If by the end of the year, you have 20 dogs out those 35 items- assign them as 'marketing' and trash them or 'donate' them and move on. 

[simply-the-best-for-you]

You'll have to choose an accounting method & you CAN use cost averaging, that is an accepted method by the IRS.  The IRS has good documentation on choosing an accounting method & the ways (3 I believe) you can do COGS.  I don't use the average method myself, but it is valid.    I would suggest looking at the IRS website & look at schedule C, that will make it much more clear what expenses you'll need to keep track of.  15 minutes spent reading through Schedule C helped me immensely.  

I can't remember the publication, but there is one for online businesses & I can't remember if that's the same one that explains the 2 accounting methods & the 3 COGS methods.  Also, once you pick an accounting method, it can't be changed.