Cash basis taxpayer with inventory

[Lob]

I have a new business that will have inventory but generate less than $25M in gross receipts.  The new tax law seems to say that the business can report on the cash method of accounting if gross receipts are less than $25M, as long as inventory isn't deducted.  Are businesses with under $25M in gross receipts with inventory now allowed to file using cash basis as long as they don't deduct the inventory and the inventory is shown on the balance sheet? Or are they still required to file on accrual basis? 

[IntuitJim · Accepted solution]

Lori, thanks for joining community. Sounds like your small taxpayer can 1) operate cash basis and 2) choose whether or not to maintain inventory on the books or expense it annually.

According to Pub 538, If you are a small business taxpayer (average annual gross receipts of less than $25 million), 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 will not 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 for inventories. 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.

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

Good luck!

[ebailey]

With less than $1,000,000 sales. Can we expense when purchased inventory type items irregardless of when they are actually sold. 

[Yota1332]

Hey Baily,

You can do what you want on your financial statements, but for taxes no you cannot deduct your inventory until sold. Even for small business taxpayers.

Pub 538

"Treating inventory as non-incidental materials and supplies.

 If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid to acquire or produce the inventoriable items treated as materials and supplies in the year in which they are first used or consumed in your operations."

If someone has a source that allows the deduction I would love to see it.

[Entrepreneurdude]

Good evening. I am a bit troubled by this response, but perhaps it's my unique situation:

I'm a small seller making less than (1m), Does 'non-incidental materials' mean general business expenses or (exclusively) costs of inventory goods??

Additionally, can I use cash method to deduct inventory if most of my business is buying bundles of books, different bundles have different prices / book count / book value/rarity, value and costs of bundles is not directly reflected in the quantity of books per bundle. So can I simply deduct ALL costs of goods at the moment of purchase (adding up receipts) and report that, which would obviously include UNSOLD inventory costs as part of the 'Costs of goods sold deduction.'

1.) I don't count my inventory because different numbers of books/rarity/price per bundle is an (inaccurate) log of my expenses.

2.) Therefore, I allocate costs of inventory based on receipts, as an accurate representation due to the nature of my business.

So, are you saying this still forces me to use the accrual method (deducting on AFTER inventory sells) simply because I keep a log of expenses balance? If so, how can I even value my inventory, as the IRS describes: 'accurate representation of expenses,' I can literally only do this by adding up the total cost of bundle receipts, as the most 'accurate' way of determining per item cost. If I can't do this for accrual accounting, then am I suppose to guess per item cost? Flip a coin maybe? I guess what I'm asking is:

'Does my unique situation allow me to deduct based on cash recording method (regardless of sold / unsold status), or are we all forced to use an accrual method for inventory cost deduction under any circumstances? If I can't determine based on bundle price / my method of cash record keeping / adding up receipts (without) subtracting unsold inventory costs, how can I even do business? Thanks!

[abctax55]

Hi there,

You’ve come to an Intuit site supporting tax professionals, and you may be looking for support as an individual taxpayer. Please visit the TurboTax Help site for support.

Cheers!

[qbteachmt]

"Does my unique situation allow me to deduct based on cash recording method"

That's not Unique. What you describe is Periodic Inventory, essentially, and your own CPA would be the best guide for how to operate and report this info for purposes of the Fed and State.

"I am a bit troubled by this response"

Income is matched to the expenses used to generate that income. Not to everything you spend, and not everything you spend is expense. And sometimes, on the internet, some answers are provided by programmers, not professional end users. It's only a bit worse than standing around the campfire or asking while at the barbershop. Get in-person professional guidance. It's cheaper to do it right the first time than to do it over.

[sjrcpa]

Booksellers record inventor at actual cost; not x books times y cost/book.