Level 1

TCJA-Inventory

Forum|Forum|7 years ago
March 21, 2019
1 reply
16 views

A small retail client keeps their books on the cash basis except on 12/31 they record inventory and adjust purchases. Under the new tax law I think they can be cash basis totally and not record inventory. Am I wrong on this? If correct how do I expense opening inventory on 1/1/2018? It is about $100,000.00.

Lacerte Tax

This topic has been closed for replies.

IntuitJim

Level 5

Sean, Thanks for joining Community.

If you are a small business taxpayer (average annual gross receipts of less than $25 million), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you will not be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment for inventories. If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.

If you choose not to keep inventory on the books, you would simply include / debit the $100K in COGS (purchases) for the year of change and credit inventory to zero it out.

Be sure to discuss the change with your client so they understand the multi-year impact of the change and aren’t surprised when profit pops back up the next year.

C

catman

Level 2

Hi, is this still applicable? And if so, what happens on the tax returns under end of year inventory? It should be zero right, if all inventory is now expensed during purchase? This whole thing is extremely confusing and I have read conflicting articles constantly regarding this. From my understanding the TCJA allows small business to deduct inventory during purchase, but others say that you can only deduct sold items and must calculate COGS to reflect accurate income... So which one is it? Thanks,

Kevin

StacyHauserAccounting

Level 2

This is still applicable although the IRS has become stricter on the rules. If a small business qualifies to treat inventories as non-incidental materials and supplies, they can deduct incidental costs in the current tax year. Incidental costs included in ending inventory the prior year gets deducted over the next 4 years. Form 3115 must be completed to change the accounting method with the IRS and the books and records of the taxpayer must reflect the election. If a business keeps up with inventory on their books, they cannot take the election.

Incidental materials and supplies can be deducted the year paid.

Non-Incidental materials and supplies include inventory and can be deducted in the year paid or the year they were provided to the customer, whichever is later.

This is directly from the IRS instructions for schedule C 2019:

"To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.

Example.

You change to the cash method of accounting and choose to account for inventoriable items in the same manner as non-incidental materials and supplies for the 2019 tax year. You accrued sales in 2018 for which you received payment in 2019. You must report those sales in both years as a result of changing your accounting method and must make a section 481(a) adjustment to prevent duplication of income.

A net negative section 481 adjustment is generally taken into account in the year of change. A net positive section 481(a) adjustment is generally taken into account over a period of 4 years. Include any net positive section 481(a) adjustments on line 6. If the net section 481(a) adjustment is negative, report it in Part V."

Stacy Hauser, CPA

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