Should i report inventory

How you will report these profits will depend on the type of corporate structure you have chosen. Your corporate structure is more about how your assets are protected -- your personal assets from business liabilities and vice versa -- than tax advantages, but the structure does play a role in what tax forms you need to file.

In order from least asset protection to greatest asset protection, here are the various corporate structures:. Sole proprietorship: You have no business entity; you will file a Schedule C with your personal tax return. Corporation: You will file form with the IRS. The business is taxed separately from the owners stockholders. Stockholders are taxed on any dividends paid to them by the corporation throughout the year. The exception is if you have a corporation, which is taxed separately from the owners stockholders and then the business would pay the employer portion of the Social Security and Medicare taxes for you, and you would just pay the employee portion.

Your inventory should be valued at your purchase cost. You have the cost of the item, but no revenue for the sale. Higher cost of goods sold means more deductions against your total income from sales, lowering your profit subject to taxation.

When you start a business that includes inventory you need to decide how you will value your inventory, the IRS accepts these three ways:. When you can't specifically identify the cost of individual items in your inventory, or the same types of goods are intermingled in your inventory and they can't be identified with specific invoices you can use one of two methods of keeping track of your inventory: the First In First Out Method FIFO or the Last In First Out Method LIFO.

If you sell products that you purchase or manufacture , and the cost of your products tends to increase over time, using the LIFO method will typically result in a lower taxable income compared to FIFO. But if you need to maintain relatively strong financials, like a balance sheet, to qualify for bank loans and satisfy your partners and investors then FIFO may be the way to go.

It was multiple freezers with the most expensive cuts of meat. In that case, a large inventory write-off will debit a loss on a separate inventory write-off account and credit inventory. This approach is taken because a large charge to COGS would distort the gross margin of the business.

An inventory write-off is nearly identical to an inventory write-down —it only differs in the severity of the loss. It could still be sold—just not at as high of a price. A write-off occurs when inventory has lost all of its value. While the degree of loss differs, the actual circumstances that cause the loss and the accounting process that must occur remain the same. Many of these situations constitute inventory shrinkage, which means loss of inventory due to issues like theft, damage, administrative error and fraud.

In all cases, a write-off must be performed to remove the no-value inventory from the accounting records to reflect the loss. Generally Accepted Accounting Principles GAAP requires that inventory be written off as an expense as soon as it is determined to have lost all value. Companies are not allowed to wait until it might be more advantageous to address it or spread it out over multiple periods, like they might treat a depreciating asset.

Broken or damaged inventory can be written off or written down. Could it be sold at a reduced price? Or is the value totally lost? Take the steps to record the loss in your COGS or your general ledger. Look for trends in damaged inventory. Are there specific areas or products with frequent issues you could address?

Examine each step of the process from receiving and put away to picking and order fulfillment to find inefficiencies and problem areas that can reduce the amount of damaged inventory.

And inventory management software can help with each step of this process, along with the needed analysis to find and fix problem areas. Also, the taxation will depend on how you handle inventory and what type of structure your organization follows. There are different rules for each of these structures to file the tax returns, and you must investigate each individually depending on your particular structure.

The basic rule is to value the inventory at your purchase cost, and all those items that do not have any value are not counted as your inventory. The loss incurred on the valueless items is shown as a higher COGS on the tax returns. This means that you have incurred a cost of the item, but there was revenue associated with it. When your COGS is higher, it would result in more deductions from your total sales and, eventually, lower your profits. Lower profits would result in lower taxable income, so you would have to pay less.

The purchased items are valued at their cost, and any shipping or other fees are also included in determining the value. It is the simplest of methods and appropriate for simple items that do not have hidden costs. According to this method, the cost of all the items is compared to their market value on a specified date.