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jgordosea, Enrolled Agent
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Experience:  I've prepared all types of taxes since 1987.
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How can i avoid paying taxes on inventory

Resolved Question:

I want to start an online business where I have over $100k in inventory year round. How can I do this without paying a lot of taxes and which business structure might be best. Thank You, Daniel
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear branchd,

 

Thank you for your question.

 

The way your question subject appears and the question content imply many things. I need to know exactly what you are meaning. For example:

 

1. Are you talking about sales tax,

2. property tax

3. income taxes

 

The issue is, that inventory may or may not attract property tax no matter what form of business you take, depending on your state.

 

Inventories are used by some states to determine sales, tax, again regardless of your business form.

 

Businss form primarly affects how your are taxed by the IRS and your state on net profits.

 

Please clarify for me.

Customer: replied 5 years ago.

Actually i am not really sure this tax stuff is new to me. I bought a couple of books and read them but I am not getting a straight forward answer. I want to start a business by myself and I want to pay the least taxes on it. I am doing a completely online business and I plan on having a large inventory on hand. My inventory may roll over year after year as some of it might move slow. I read that you have to pay some type of tax based on the difference between starting inventory and inventory at the end of the year. I will starting with $0 inventory. If I buy stuff and sell it for 3-4 times what i pay for it do I have to pay taxes on the difference between what i pay and what i list it for even if it don't sell. I am sorry about this confusing question I just don't know if I will be able to start my business because taxes seem way to high when i figure it out. It seems I will owe the irs a lot of money if i build a 100k inventory within 1 year. Your help is greatly appreciated.

Expert:  jgordosea replied 5 years ago.

Greetings,

 

Since you say you are not "getting a straight forward answer" I will try to simplify it and explain it in plain language.

 

When you have inventory that you sell only the amount of inventory that is sold is what is used to figure your profit. What you pay for the inventory you sell is called your cost of goods.

 

To figure your cost of goods for the year you take what you have on hand at the beginning of the year, add your purchases and subtract your inventory at the end of the year to find how much of the inventory was used in the year.

 

For example, in the year you start with zero, purchase say $10,000 and your count of the cost of what you have on hand at December 31 was $6,000 it would mean that you had $4,000 cost of goods sold.

 

The cost of goods sold is subtracted from your sales receipts to get your gross profit. Expenses of operations (other than cost of goods) are subtracted from your gross profit to get your net profit. You pay tax on your net profit each year.

 

If in your first year you had sales of $7,000 then subtract your cost of goods of $4,000 (as above) for a gross profit of $3,000. If your other expenses were $1,000 than your net profit after subtracting the $1,000 expenses is $2,000. You will owe income tax and self employment tax on the $2,000.

 

So you can see that you do not count the inventory as an expense until you sell (or dispose) of it. You also do not pay tax until you have gotten the receipts from the sale.

 

Please note that it is important to count and value your inventory at the end of the year for correctly figuring your taxes (and maybe more often for accurate management reports).

 

Builiding inventory does not result in taxable income. You pay tax on the sales less cost of goods less other expenses.

 

I hope this helps even though it is a bit simplified (and only speaks to inceom tax) in order to make it more straight forward. For more details and links see http://www.irs.gov/businesses/small/article/0,,id=109807,00.html

 

Best wishes with your new business.

 

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3011
Experience: I've prepared all types of taxes since 1987.
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