Are you a small business selling inventory? This is for you!
Historically, inventory has been treated as accrual basis, which means inventory could only be expensed in the year of the sale, not when you purchased it. This has changed now, and will benefit cash-basis small businesses. A new clause has been added to the tax code. In a nutshell, the IRS has now ruled that small business taxpayers (any business with sales under $25 million) can account for inventory for tax purposes either:
- as non-incidental materials and supplies (this is not new) *OR*
- Inventory for tax purposes conforms to the taxpayer’s accounting procedures.
If you have inventory as a cash basis taxpayer, the process will be changing a bit. As long as you have good record keeping, you consider everything that you purchase as an expense, and you do not take or report on inventory; you are allowed to expense the inventory as cost of goods sold. This can apply to existing clients if they have inventory, but do not keep track of it, allowing them to deduct inventory as soon as they purchase it.
This could be a windfall for many small businesses and create an ability for them to expense inventory that they were previously carrying on their books as an inventory asset. In order to take advantage of this new rule, the business owner would need to file a Change in Accounting Method form with the IRS. This is a service that Tembo CPAs is happy to provide.
Please contact us at [email protected] if you are interested in learning more about how this new rule may affect your business.
