My income is up this year. I was planning on buying some inventory to bring my taxes down. If I purchase $10,000 inventory before the end of the year would that save me some tax money? Karen
Karen, Maybe. There are two different types of inventory purchases
· Inventory for resale
· Inventory for back bar
If you purchase inventory for resale, that purchase would never be deductible. You are required to take a physical count of your retail inventory on hand at the end of the year, and whatever the cost of that inventory is, it is not deductible until the inventory is actually sold.
The purchase of your back bar inventory is another story. Whether or not this purchase is deductible depends on your method of accounting. If you are on the cash receipts and disbursements method of accounting I have good news. You can deduct the purchase even if the back bar inventory is still on the shelf.
Example 1: Jan Clipper is on the cash basis of accounting. On December 27, 2007 she receives an order of color in the amount of $2,000.00 and $3,000.00 of product for resale. Before the end of the year Jan writes a check to the distributor for $5,000.00. Since Jan is on the cash method of accounting she can deduct the $2,000.00 for the color. Jan would only be able to deduct that portion of the $3,000.00 that was sold before the end of the year.
My answer to the back bar purchases is different if you are on the accrual method of accounting. If you are on the accrual method of accounting you are required to take an inventory of back bar along with retail and are not able to deduct until the back bar is used up.
Example 2: The same facts as above but in this case Jan Clipper is on the accrual method of accounting. In this case she would be required to inventory the back bar inventory and only that amount that is used before the end of the year would end up being deductible.
Let me know if you have any other questions. It is a pleasure serving you.
Larry Kopsa CPA
Karen, Maybe. There are two different types of inventory purchases
· Inventory for resale
· Inventory for back bar
If you purchase inventory for resale, that purchase would never be deductible. You are required to take a physical count of your retail inventory on hand at the end of the year, and whatever the cost of that inventory is, it is not deductible until the inventory is actually sold.
The purchase of your back bar inventory is another story. Whether or not this purchase is deductible depends on your method of accounting. If you are on the cash receipts and disbursements method of accounting I have good news. You can deduct the purchase even if the back bar inventory is still on the shelf.
Example 1: Jan Clipper is on the cash basis of accounting. On December 27, 2007 she receives an order of color in the amount of $2,000.00 and $3,000.00 of product for resale. Before the end of the year Jan writes a check to the distributor for $5,000.00. Since Jan is on the cash method of accounting she can deduct the $2,000.00 for the color. Jan would only be able to deduct that portion of the $3,000.00 that was sold before the end of the year.
My answer to the back bar purchases is different if you are on the accrual method of accounting. If you are on the accrual method of accounting you are required to take an inventory of back bar along with retail and are not able to deduct until the back bar is used up.
Example 2: The same facts as above but in this case Jan Clipper is on the accrual method of accounting. In this case she would be required to inventory the back bar inventory and only that amount that is used before the end of the year would end up being deductible.
Let me know if you have any other questions. It is a pleasure serving you.
Larry Kopsa CPA
