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Do the 2018 Tax Law Changes Affect When You Can Deduct Inventory? - YouTube
Channel: Catching Clouds Academy
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hey it's patti scharf CPA and co-founder
of catching clouds the leader in
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e-commerce accounting today I want to
talk about whether or not the 2018 tax
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law changes effect when you can deduct
your inventory I've been asked this
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question over and over and over this
year and I think there's a lot of
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confusion around the topic in fact I've
even talked to other CPAs and there are
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mixed answers so I'm gonna give you my
opinion and kind of walk you through the
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my thought process and stuff and
hopefully it will will help clear some
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of the confusion okay but before we get
started I want to say that I have done
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taxes for years but I also have not done
taxes in years so make sure that for
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your own personal situation you go talk
to your own tax adviser
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okay so let's get started why do you
even care about this like what's what's
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the whole point of knowing when you
deduct your inventory so let's say
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you're selling online and use you sold a
million dollars this year and this year
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you also went and spent four hundred
thousand dollars on product so you
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bought a whole bunch of product you went
online you sold it you might have some
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left over chances are if you're selling
that much you probably have some left
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over so knowing how much you can deduct
it means like if you can deduct the
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whole thing then your taxable income is
six hundred thousand dollars just for an
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oversimplification
for this example taxable income would be
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six hundred thousand dollars
if you can't deduct any of it your
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taxable income is a million dollars so
that four hundred thousand dollars of
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income that you get taxed on is a pretty
big deal
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the other reason you want to know is
when you have a good handle on how much
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inventory you're able to deduct you can
start paying attention to whether you're
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making profit on your specific sales
because you don't want to be in a
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position where you are losing $1.00 per
sale because you know you can't make
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that up on volume it just like drowns
you faster okay so so that's why you
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care about when you can deduct your
inventory so what is inventory and I
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feel like you can't really talk about
inventory without talking about cost of
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goods sold those two go hand-in-hand
inventory are those product purchases I
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was just talking about so if you bought
400 thousand dollars worth of product
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that becomes inventory it stays
inventory until you sell it when you
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sell it
that's called writing it off it's called
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expensing it it's called a deduction it
is your expense so the four hundred
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thousand dollars becomes cost of goods
sold inventory and cost of goods sold
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are seasaw amounts you spent four
hundred thousand dollars no matter which
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way you look at it but maybe you have
three hundred thousand dollars still in
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inventory and you sold a hundred
thousand or maybe you sold three hundred
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thousand and you still have a hundred
thousand left in inventory these two
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amounts
always balance out and match the amount
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that you spent in cash the next concept
you need to know about us cash versus
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accrual these are two different
accounting methods I did a whole video
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on how to determine cash versus accrual
so go check that out if you aren't
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familiar with it now let's go on to the
2018 tax law changes now the biggest
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change and this is what has everybody
kind of in an uproar is the gross
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receipts test now what this is is it
says hey here's what it used to be hey
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if you have five million dollars in
gross receipts so basically you've
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collected five million dollars from your
customers or more then you have to be
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accrual basis which means you have to
record everything on the accrual method
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if you're under that if you're a small
business you can use the cash method
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it's easier you don't need to worry
you're pretty look pretty little head
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about it okay it was actually the limit
was 1 million if you're an inventory
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based retail business so there are a lot
of people that were like right at that
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million mark or just above and they were
having to file using accrual based
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method and they're kind of grumpy about
it ok so what happened with the tax law
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changes is that the limit got bumped up
to 25 million dollars so that's a pretty
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big jump and a lot of people who are
right in between that million and 25
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million when yeh now I can be cash basis
and so everybody's thinking yay I can
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now deduct my inventory when I buy it
not as products are sold because I'm on
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cash basis and so that's how that works
the problem is in this in this new law
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it says if you have non incidental
materials and supplies so things that
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aren't really your core product that
you're selling maybe it's a sleeve that
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you know you include for packaging or
you know it's not really what the person
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is what your customers buying it's just
part of the fluff around it
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that stuff yes you can deduct it or it
says it follows the taxpayers method for
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financial statement purposes so what
does this mean
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when I first heard this and people were
like yeah I get to just deduct whatever
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I want to when I buy it just in my gut
it just doesn't feel right because the
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nature of cost of goods sold is it is
literally cost of goods that are sold so
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if you don't sell the goods there's no
cost related to them so I really in my
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heart think that this change of
threshold saying above this your accrual
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basis and below at your cash basis has
nothing to do with the amount that you
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record as cost of goods sold
basically your cost of goods sold just
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has to match up with whatever method
you're choosing for your income so if
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you're reporting your income in 2018 the
costs related to those sales needs to be
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included in 2018 if you are reporting
income in 2019 the costs related to that
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income needs to be reported in 2019 you
can't like mix and match that way it's
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just not what the nature of cost of
goods sold is in my opinion with that
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said I asked a whole bunch of accounts
because I heard a lot of sellers saying
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oh well I talked to my CPA and they said
yeah that's legit and I'm like okay well
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I'm not signing your tax return so do
whatever you feel comfortable with but I
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just don't think it's right I've heard
that there's going to be more
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clarification coming on or maybe people
are just hoping that there's gonna be
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more clarification about this but I
think there's some confusion out there
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about when inventory can really be
deducted I would argue that this these
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new tax laws changed nothing and you
just have to report your cost of goods
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sold when the goods are reported as
income others may have another opinion
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if you have another opinion and a good
argument why go ahead and leave a
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comment
down below I think this is an
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interesting case and I think it's weird
so I think it's worth discussing I like
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to discuss weird things so I guess
that's it I hope you found this video
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helpful if you did please like comment
and share if you haven't already please
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subscribe and I'll catch you later
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