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At Outright, we get that the crafting part of your business is the fun part. We also get that things like taxes and bookkeeping are not quite as fun. We strive to make that part of your business a little less taxing, so here’s everything you need to know about tracking your inventory for tax-purposes, in a nutshell:
The first thing you need to be aware of when tracking inventory for tax purposes is that you do need to have a value for your inventory at the beginning and end of the year. Sounds obvious, but getting the value at these two points may be a bit involved. If this is your first year as a crafter, the beginning balance in your inventory is $0.
So, what should be included in your inventory calculation? You want to be sure to include the following:
However, there are a few things you do not include:
Now the question becomes how do to assign a value to what you have in your inventory. There are three methods to do this:
Once you have figured out the items to include in inventory and their values, you are ready to prepare your tax forms for the year. Here are the steps you take:
While determining inventory costs and how to classify the costs can be complicated, the best thing to do is get started now in determining your costs so you can get a jump on the year end, and take the calculations and steps one at a time. If you still have questions, find a local accountant to give you a hand. We love to help small business owners meet the goals they set for their business.
Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at email@example.com. In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.