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To make matters more complex, some of your materials and supplies are considered part of your inventory as well.
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If there’s stuff you’re working on that’s not “finished” but a work-in-progress, that’s considered part of your inventory too. If it’s a finished item ready to go, then it’s part of your inventory. They’re really considered inventory whether you’ve already got them listed for sale, or whether they’re in a pile waiting to be stocked. What does that mean? If you’re a maker or a crafter, and you make items and then list them for sale or bring them to a craft show, all those items you have up for sale are considered your inventory. In general, your inventory includes the finished products you have for sale on your shelf. What is considered inventory?įor tax purposes, all of the following are considered to be inventory: Finished goods – You do not have to deal with inventory if you’re strictly a service provider, or if you sell only digital goods (lucky, lucky you!). This true whether you’re crafting items from supplies (like a jewelry maker), making goods to order, buying finished goods at wholesale and simply reselling them, sourcing vintage goods and selling them at a markup, or anything in between. If you sell physical goods, then you likely have to deal with inventory. It can save you a big headache in case of an audit, but it can also help you accurately price your goods and ensure profitability for your shop. There’s a lot of debate out there about whether the IRS requires small biz makers & crafters to track inventory and COGS or not.īefore I dive in, understand that accurately recording your inventory and supply costs is important for both taxes and bookkeeping purposes. Whether or not to keep detailed inventory counts & records can be a somewhat controversial topic in the maker community. In part 2, I’ll delve into dealing with cost of goods sold (COGS). This didn’t work out the way they hoped after understanding the tax system.Inventory and cost of goods sold are probably the most complex accounting concepts that makers and crafters have to tackle. Today I’m going to attempt an overview of some important inventory concepts in simple, plain English. I have met numerous people and seen a number of occasions, when entrepreneurs over-invested in their inventory stocks thinking it would help provide a “big tax deduction” that they could use for NOLs. Making sure you understand the difference between the two will save you a lot of heartache. If there is no increase in the cost of inventory, then there will be no benefit. Obviously, it is possible that the cost of inventory did change within a single year. Usually, inventory and expenses increase over time, thus using the last price is usually going to give you a larger reduction in gross income. LIFO means that every product is sold at the “last price” paid. LIFO requires an attention to details because you’re trying to track the cost of inventory that you’ve purchased. This will help you decrease your gross income and as result your taxable income.Īnother way to use inventory to lower your tax liability is to use “last in, first out” or LIFO. If you know or you’re able to project your inventory needs, then you’re able to pre-purchase inventory that you know will be necessary. The best way to use inventory to reduce your tax liability is year-end planning.
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A tax deduction may result in “negative taxable income” or a NOL.