On 02/24/2011 03:48 PM, George F Emerson wrote: > Wim B Wrote: > >If you brought in, lets say, $50,000, last year, and you bought $1000 > worth of parts, then you are taxed on $49,000. > > Not exactly. I suppose it could work that way if you never bought a > replacement part until you had a customer ready to buy it, but that > would mean that if you found a bridle strap that needed to be > replaced, you would have to order the part and come back a week or so > later to install it. I don't think any of us do business that way. > > If you purchase parts in advance of the need to have them available > for immediate use, such purchases cannot be written off as an > expense. It increases the company's inventory of replacement parts, > and is therefore a company asset. At the end of the year, you may > well pay income tax on income that was not realized as cash income, > but as an increase value of inventory assets. > > If a company derives any income from sales, the IRS will need to see a > beginning inventory (the same as last year's ending inventory), plus > inventory purchases made during the tax year, minus the year's ending > inventory. The difference is the cost of goods sold, which is what is > deductible as an expense for that year. It might be that the cost of > goods sold turns out to be less than expenditures on inventory > purchases, in which case, you have an indirect profit from an > increased value of inventory goods. On the other hand, the cost of > goods sold might turn out to be greater than expenditures for > replacement parts, in which case, you have depleted inventory > accumulated in previous years, and reduced the value of the end of > year inventory. It's not like you are paying tax on parts you bought > to eventually sell to customers. Whether you care to look at it that > way or not, the IRS views it as income, whether it is cash income or > an increase in the value of company assets. > > Frank Emerson Frank, That sounds all well and good, except by my tax man, said not to worry about inventory and mark it as supplies or COGS. Because, this is part of my situation, I buy 3 yards of bellows cloth for rebuilding player reservoirs and pumpers. Now, I have a single piece of cloth 3 yrds by 60" wide. So I cut a bunch of material to use on recovering these items. Left over, I have a piece of material with a straight line on a couple of sides and a zip-zap of material on the other side, so now I have what, should be called "scrap" because it's not good for any bellows work as it is. I have a box of about 10 of such pieces. How do you deal with things like this as - quantifiable - inventory - - answer - you don't ! You mentioned bridle straps - ok - lets look at that: You buy a box of bridle straps for supplies and repairs out in the field. If memory served me, a box is sold by 100 per box. Ok, so you do a piano action (88) = leaves 12. Over the year you place 4 = which leaves 8. Example: First, was the box bought as a single order or as a big enough order to get a discount per box. Let's take the simplest, single order. The box of 100 bridle straps cost $12.95 = or $0.1295 for strap = totaling 8 x 0.1295 = grand total $1.036 Now, based on your conviction, you are going to spend the time to figure out this for taxes - give me a break. AND, everything else you bought !! I know I don't have time for all of this - so just write if off as a one-time cost of $12.95 - with NO INVENTORY - you WILL use it eventually. Back to reality, I can see doing this if we were truly in the "retail" business. Duaine -- Duaine Hechler Piano, Player Piano, Pump Organ Tuning, Servicing & Rebuilding Reed Organ Society Member Florissant, MO 63034 (314) 838-5587 dahechler at att.net www.hechlerpianoandorgan.com -- Home & Business user of Linux - 11 years
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