So, back to the IRS guidance and we find under IRS Reg. (“Incidental” materials on the other hand, are things you purchase that are not involved in the production of your finished goods: office supplies typically are categorised as such). Without these materials, you essentially would not have a product to sell. “Not incidental” are the materials that are required for the manufacture of your products - examples for a handmade business could be fabric or buttons. There are a couple of interesting terms in this line that can confuse, so let’s go through it carefully. Moving onto the line: “These taxpayers can also account for inventoriable items as materials and supplies that are not incidental” is the important one to note here. This is great news for a small seller as cash basis accounting is a much simpler process than accrual, but doesn’t answer our question about inventory. This essentially means that you can record income when it is received and your expenses when they are paid. This is not true.įirstly, what is clear is if you make under $1 million in a year you don’t need to use the accrual method and can instead use the more straightforward cash method of accounting. So, let’s break down what this actually means - this particular paragraph is often misunderstood as meaning that if you make under $1 million in sales you don’t need to keep inventory. These taxpayers can also account for inventoriable items as materials and supplies that are not incidental. However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Looking at Publication 334 (2015), Tax Guide for Small Business it states under Inventories: To try and clarify this confusing situation, let’s start with the official guidance from the IRS.
Others will say that it is incredibly important to track your inventory no matter your size. Determining if you need to keep proper inventory records for your handmade business can be hard to get a definite answer on: there will be some that will tell you that if you have a small turnover or are treating it “like a hobby” it’s not really required or just not worth the trouble.
0 kommentar(er)
