If you work for yourself and manufacture or purchase items for resale, according to current IRS rules, you must report inventory expenses. All business owners are required to report those expenses on the back of their Schedule C tax form because inventory costs are not deducted in the same way as other normal business expenses.

Because of this, the IRS requires all businesses, no matter how small, to track inventory expenses separately from all other business costs. Inventory expenses not only include the cost you pay for those resale items, or all the parts needed to assemble the items, but they also include all the shipping costs and wages paid for the assembly.

You are not allowed to deduct inventory expenses until an item is sold or permanently removed from your commercial inventory. All unsold inventory costs must carry over to the next fiscal year. Unsold inventory includes everything that you have not sold, traded, thrown away, given away, or donated. It also includes all inventory items found in stores and warehouses that have been sold on consignment.

There is a small section on the back of the Schedule C small business tax form where you fill in the value of your starting inventory, the cost of all inventory added during the current tax year, any inventory removed for personal use, and its purpose. year inventory value.

For IRS inventory records that will survive a tax audit, I have come up with a formula called LATER: THEist, TObill Ttotal, mevalue and Report. Is that how it works:

LIST – Write down all items purchased for resale as they arrive. Make a simple six-column vertical graph on lined paper; I use a spiral notebook. Title those six columns as follows:

• Article name
• Total cost
• Number of items that can be sold
• Cost per item
• Remaining inventory
• Year-end value

Fill in the first three columns as the items arrive. To get the cost per item, divide the total cost of each item by the number of salable items and write that amount in column four. You must complete the last two columns on the last business day of the fiscal year.

BILL – On the last day of the fiscal year, account for all unsold inventory; both on their shelves and for sale on consignment. Enter this count for each item as inventory remaining.

TOTAL – Multiply the remaining inventory count by your cost per item for each item and enter that value in the final column. Add everything up in the second and last column. The first figure is the total spent to add merchandise and the second is your year-end inventory value.

EVALUATE – Review all remaining inventory to assess its quality and shelf life. Remove all unsold merchandise to be thrown away, donated, or reserved for use in future promotions. Deduct the value of any inventory thrown away or donated. Items used for future promotions will be deducted when used.

REPORT – On the back of your Schedule C tax form, you will find a place to enter the total of all merchandise added and your year-end inventory. Add the fiscal year beginning inventory and merchandise added together, and subtract the remaining inventory value to complete the cost of goods sold.

This year’s year-end inventory value becomes the opening inventory value for the next fiscal year.

Take the time to make this simple six-column inventory chart at the beginning of the fiscal year, follow the LATER formula and you’ll get those inventory deductions correct every time.