Valuing inventory for tax purposes

[middleclassvaluables]

Hi I am having my taxes done for 2020 and 2021. In 2020 I started selling personal items and that is when I started buying for resale. I thought I did my research and that if you make less than $1 Million in sales you don't have to keep an inventory and you can deduct your inventory as an expense under Supplies and Materials. When I took my records up to H&R  Block she informed me that I needed to come up with COGS from my inventory and I needed to value everything. I have no idea how to do this starting with the mix of my old personal items and then the inventory I bought to sell.

How do I figure my beginning inventory now?

[femmefan1946]

Your personal items do not have to have a value. You don't want them -- you've used up the value. (Okay not really, but...)

For items purchased for resale, yes, you should keep track of your procurement costs.

And as your tax clerk told you, also your costs for postage and shipping, for printer ink, for bubblewrap, for fees and taxes on sales, etc.

I am not a tax expert.

[coolections]

You guesstimate. Remember the items you bought 20 years ago lost at least half their value or more. Deduct the current used cost, you can check Ebay to see what things sell for in the condition like yours.

[onlinecentral]

The accrual method of accounting uses a yearly physical inventory, beginning and ending inventory valuation. You probably don't want to use that method.

The cash method of accounting treats inventory as an expense. Everything I bought in 2021 with the intention to resell is totaled and that Cost of Goods is entered as a deduction whether it sold in 2021 or is still unsold on the shelf. I can't carry over or accrue that UNSOLD Cost of Goods into some future year.
Read IRS Publication 334 and choose to treat your inventory as supplies.
https://www.irs.gov/pub/irs-pdf/p334.pdf

This is from a discussion about assigning a value to inventory you have owned for a long time.
If a seller doesn't have a receipt or records to establish the cost basis of an item, they can use the Alternative method, which is an estimate of the fair market value at the time the item was acquired. This is described in IRS Publication 551: Basis of Assets
https://www.irs.gov/pub/irs-pdf/p551.pdf
A lot of small sellers are selling items they have inherited, and in this case, the Alternative method is always used to establish the cost basis. It's the fair market value at the time the estate was settled.

The Legacy inventory you sold in 2021 would have a Cost of Goods that would be deducted. Whatever remains unsold on the shelf, you will deduct that Cost of Goods in the future in year it sells.

[this*old*attic]

That’s what I do

Of course, it bites when you store everything for 7-8 years and then start selling again.

So, you just spend a few thou to build a backyard shed that’s nice enough to be an office someday, and go shopping. 😂😂😂

[caldreamer]

Value of your used household items would be "thrift store value" (if you don't have receipt to prove purchase).  

You need to create spreadsheet showing inventory# for every item, description, cost of goods, date listed and date sold.   When you create listing be sure to include inventory# (when that item sells you deduct "cost of goods" from your inventory list).

   $5,000 BEGINNING INVENTORY (January 1)  total "cost of goods" for all inventory you have listed for sale

- $1,000 "cost of goods" for sold inventory

   $4,000 ENDING INVENTORY (December 31)

[richard1rst]

This is not meant to be an answer - only something for you to chew on.

In proper accounting terms inventory is valued at "the lesser of cost of value". So if you bought something years ago for $10.00 and you have used it to the point that you can realistically say it has no real value, the "the lesser of cost or value" is zero. As an alternative, you can place any "value" on it you want.

BUT

If you then sell if for $10.00, since you valued it at zero, then your profit is the full $10.00.

If you value you at $6.00 then the profit on the $10.00 is only $4.00.

In other words, if you value it at zero then you RAISE you taxable profit and, therefore, your taxes. And I don't think you want to do that.

Do you?

Give it some thought.

[luckythewinner]

---

---

When I took my records up to H&R  Block she informed me that I needed to come up with COGS from my inventory and I needed to value everything

It is advisable to come up with COGS for the items you sold this year, but it is not necessary to value your unsold inventory. Ask her to bring up IRS Publication 334 and read the section called "Treating inventory as non-incidental material or supplies" and explain why it would not apply to you. 

[dbfolks166mt · Accepted solution]

     There are multiple types of inventory but probably what most eBay sellers would be concerned with is what falls into the merchandise category. Other types can involve tangible type assets against which you can also take depreciation. The small business exemption for inventory is outlined in IRS publication 538. 

https://www.irs.gov/pub/irs-pdf/p538.pdf

     If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. A small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement (as defined in section 451(b)(3)). If it does not have an applicable financial statement, it can use the method of accounting used in its books and records prepared according to its accounting procedures. See Regulations section 1.471-1(b).

     If, however, you choose to keep an inventory, you generally must use an accrual method of accounting
and value the inventory each year to determine your cost of goods sold. You qualify as a small business taxpayer if you have average annual gross receipts of $26 million or less (indexed for inflation) for the 3 prior tax years, and re not a tax shelter (as defined in section 448(d)(3)).

[dbfolks166mt]

     I am fortunate that I have never exceeded the IRS thresholds for a small business inventory so it is one headache I simply avoid at tax time and do not report inventory. I also utilize the accrual accounting method for my own book keeping simply because of it's simplicity and the fact that it is the only one recognized by GAAP. 

     On a line by line basis it is only important to my own book keeping since revenues and expenses are at the aggregate level for tax purposes. 

[dnasilver]

We would call whoever you have been talking with and ask a simple question. Ask them which inventory method is best for your type of selling or you can ask them to explain the differences of LIFO, FIFO, WAC, or Specific Identification and how it changes your taxes. If they cannot answer, then they do not know enough about you and your finances to be handling your taxes. It might be worth consulting with a CPA or Tax Attorney. 

[luckythewinner]

---

@dbfolks166mt wrote:

I also utilize the accrual accounting method for my own book keeping simply because of it's simplicity and the fact that it is the only one recognized by GAAP. 

---

I use cash basis because of its even greater simplicity and because I do not care whether GAAP recognizes it or not. 

[mybigsale]

@middleclassvaluables 

@richard1rst 

For the item originally purchased for $10:

IF the item always sells for $10-$12 (used) on eBay and other platforms...

Why wouldn't the market value be $10 and not $0 or $6?

If it sold for $12 (and $12 was the market value), wouldn't the value be set at $10 ("the lesser of cost or value")?

[toomuchstuffagain35]

I think you should take this up the H&R Block food chain. This person obviously doesn't have a clue and needs some retraining.

[richard1rst]

---

@mybigsale wrote:

@middleclassvaluables 

@richard1rst 

For the item originally purchased for $10:

IF the item always sells for $10-$12 (used) on eBay and other platforms...

Why wouldn't the market value be $10 and not $0 or $6?

If it sold for $12 (and $12 was the market value), wouldn't the value be set at $10 ("the lesser of cost or value")?

---

In standard accounting terms "value" is not the retail price or even what you might be able to sell it for. Inventory is carried on the books at the actual wholesale or manufactured cost (not the ultimate retail price) or, if it is an outdated or "shop worn" item then its value is written down (and is in fact a tax loss in the year it us written down) to a lesser value. If something cost $10.00 but is now damaged it is now valued at less than $10.00 - even if ultimately you could sell it for $20.00.

Think of a car dealership. Once a car gets to be a year or two old, even if it has never been used, it has a lower value than a brand new car. So the inventory value is written down to reflect the lesser value that an older car has versus a new car. That it might still sell for more than what the dealer paid (although not the same profit it would have made if it had been the current year's model),  makes its value now less than what the dealer paid.