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2005 Tax Filing

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2005 Tax Filing

2005 tax filing 6. 2005 tax filing   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. 2005 tax filing However, to determine these costs, you must value your inventory at the beginning and end of each tax year. 2005 tax filing This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. 2005 tax filing This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. 2005 tax filing However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. 2005 tax filing If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. 2005 tax filing For more information, see chapter 2. 2005 tax filing Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. 2005 tax filing These lines are reproduced below and are explained in the discussion that follows. 2005 tax filing 35 Inventory at beginning of year. 2005 tax filing If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. 2005 tax filing Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. 2005 tax filing Subtract line 41 from line 40. 2005 tax filing  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. 2005 tax filing If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). 2005 tax filing Opening inventory usually will be identical to the closing inventory of the year before. 2005 tax filing You must explain any difference in a schedule attached to your return. 2005 tax filing Donation of inventory. 2005 tax filing   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. 2005 tax filing The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. 2005 tax filing You must remove the amount of your contribution deduction from your opening inventory. 2005 tax filing It is not part of the cost of goods sold. 2005 tax filing   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. 2005 tax filing Treat the inventory's cost as you would ordinarily treat it under your method of accounting. 2005 tax filing For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. 2005 tax filing   A special rule may apply to certain donations of food inventory. 2005 tax filing See Publication 526, Charitable Contributions. 2005 tax filing Example 1. 2005 tax filing You are a calendar year taxpayer who uses an accrual method of accounting. 2005 tax filing In 2013, you contributed property from inventory to a church. 2005 tax filing It had a fair market value of $600. 2005 tax filing The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. 2005 tax filing The charitable contribution allowed for 2013 is $400 ($600 − $200). 2005 tax filing The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. 2005 tax filing The cost of goods sold you use in determining gross income for 2013 must not include the $400. 2005 tax filing You remove that amount from opening inventory for 2013. 2005 tax filing Example 2. 2005 tax filing If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. 2005 tax filing You would not be allowed any charitable contribution deduction for the contributed property. 2005 tax filing Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. 2005 tax filing If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. 2005 tax filing Trade discounts. 2005 tax filing   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. 2005 tax filing You must use the prices you pay (not the stated prices) in figuring your cost of purchases. 2005 tax filing Do not show the discount amount separately as an item in gross income. 2005 tax filing   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. 2005 tax filing Cash discounts. 2005 tax filing   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. 2005 tax filing There are two methods of accounting for cash discounts. 2005 tax filing You can either credit them to a separate discount account or deduct them from total purchases for the year. 2005 tax filing Whichever method you use, you must be consistent. 2005 tax filing If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. 2005 tax filing For more information, see Change in Accounting Method in chapter 2. 2005 tax filing   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. 2005 tax filing If you use this method, do not reduce your cost of goods sold by the cash discounts. 2005 tax filing Purchase returns and allowances. 2005 tax filing   You must deduct all returns and allowances from your total purchases during the year. 2005 tax filing Merchandise withdrawn from sale. 2005 tax filing   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. 2005 tax filing Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. 2005 tax filing You must also charge the amount to your drawing account. 2005 tax filing   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. 2005 tax filing As stated above, you also use it to record withdrawals of merchandise for personal or family use. 2005 tax filing This account is also known as a “withdrawals account” or “personal account. 2005 tax filing ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. 2005 tax filing Small merchandisers (wholesalers, retailers, etc. 2005 tax filing ) usually do not have labor costs that can properly be charged to cost of goods sold. 2005 tax filing In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. 2005 tax filing Direct labor. 2005 tax filing   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. 2005 tax filing They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. 2005 tax filing Indirect labor. 2005 tax filing   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. 2005 tax filing Other labor. 2005 tax filing   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. 2005 tax filing Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. 2005 tax filing Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. 2005 tax filing Those that are not used in the manufacturing process are treated as deferred charges. 2005 tax filing You deduct them as a business expense when you use them. 2005 tax filing Business expenses are discussed in chapter 8. 2005 tax filing Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. 2005 tax filing Containers. 2005 tax filing   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. 2005 tax filing If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. 2005 tax filing Freight-in. 2005 tax filing   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. 2005 tax filing Overhead expenses. 2005 tax filing   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. 2005 tax filing The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. 2005 tax filing Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. 2005 tax filing Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. 2005 tax filing Inventory at the end of the year is also known as closing or ending inventory. 2005 tax filing Your ending inventory will usually become the beginning inventory of your next tax year. 2005 tax filing Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. 2005 tax filing Prev  Up  Next   Home   More Online Publications
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The 2005 Tax Filing

2005 tax filing Index A Assistance (see Tax help) F Free tax services, How To Get Tax Help H Help (see Tax help) M More information (see Tax help) P Publications (see Tax help) T Tax help, How To Get Tax Help Taxpayer Advocate, Contacting your Taxpayer Advocate. 2005 tax filing TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications