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I have a small retail home based business. I am a cash based…

I have a small...

I have a small retail home based business. I am a cash based business using an accrual inventory system. Last year our income was much higher than expected. I have done some research and I believe I can change my inventory to a cash basis. What I think I can do is write off my last ending inventory, 63K and my purchases for the year, appx 80K off on 2017 taxes. Is my assumption correct.

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

A sole prop on a regular schedule C

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Answered in 11 minutes by:
3/23/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,729
Experience: Taxes, Immigration, Labor Relations
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While that is possible - your assumption that you may change accounting method for inventory is not exactly correct...

See here

page 13

https://www.irs.gov/pub/irs-pdf/p538.pdf

The rules for valuing inventory are not the same for all businesses.

The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income.

Your inventory practices must be consistent from year to year.

So - to change your accounting method for inventory - you should apply and receive an approval from the IRS.

You will need to provide arguments why the method you are choosing will better and clearly reflect your income and that is accepted for similar businesses.

The argument for changing because if will reduce your tax liability in this specific tax year will not be accepted.

Form 3115 is used to adopt or change accounting methods.

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Customer reply replied 1 month ago
I have read that since my gross is below, I think it is a million, I don't need prior approval. I do understand that once I change, I cant change back year to year.

You meet the gross receipts test

-- for qualifying taxpayers if your average annual gross receipts for each test year is $1 million or less.

-- for qualifying small business taxpayers if your average annual gross receipts for each test year is $10 million or less.
So that is not an issue.

You are correct - it is possible to file Form 3115 under the automatic change procedures.

Basically - you want to account for inventoriable items as materials and supplies and not to keep year-end inventories.

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Customer reply replied 1 month ago
That would be true - This year, 2017 I would have a write off. Every year following I would only be able to deduct my purchases for the year. If my inventory fluctuates, it would have no effect on my income.

Yes - that might create larger income in some years and smaller in others - so that method will actually less reflect your retail business model - but will simplify your accounting.

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Customer reply replied 1 month ago
Bot***** *****ne - I can do this with the understanding that it could affect future years income

Yes - you may change your accounting method by filing form 3115

The total net business income will be actually the same,

but it might be higher or lower in some years depending on your business activities.

Lev
Lev, Tax Advisor
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Customer reply replied 1 month ago
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