Cost of Goods Sold (NO Inventory) VS Supplies as Expenses

Understanding Cost of Goods Sold (No Inventory) vs. Supplies as Expenses

Although understanding the difference between Cost of Goods Sold (COGS) and reporting supplies as expenses may initially seem complicated, it's actually quite straightforward once you grasp the concept.

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Inventory Considerations

When you sell parts or materials to customers, these items are considered inventory. Whether you sell them directly off the shelf or as part of a repair service, they are treated the same way. The amount you paid for these parts should only be reported in the "Inventory/Cost of Goods Sold" section of your tax return, not elsewhere.

Because you don’t maintain a physical inventory for sale, managing your COGS is much simpler.

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Tracking Inventory

Your Beginning of Year (BOY) Inventory balance should be $0. This refers to the cost of inventory you physically possess on January 1 of the tax year.

Your End of Year (EOY) Inventory balance should also be $0. This reflects the cost of inventory in your possession on December 31 of the tax year.

The Cost of Goods Sold (COGS) is the total amount you paid for the inventory you sold during the tax year. For example, if your COGS is $5000, this amount will be deducted from your gross taxable business income, ensuring you aren’t taxed on it.

Critical Points

It's imperative that your BOY Inventory balance matches your prior year's EOY Inventory balance. If it doesn’t, be prepared to explain the discrepancy to the IRS. They rarely accept excuses, and you'll likely face a penalty.

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