When operating a retail business, a company owner may purchase a large amount of inventory to sell to customers. However, at the end of the year, a company could be left with more inventory than they would have expected. When this happens, a business owner may struggle with how to manage taxes for inventory. If you need assistance managing taxes for your inventory, you should consult with an experienced Roseville tax preparation and planning accountant as soon as possible. The Cook CPA Group has an interest in working with small businesses that require accounting services to efficiently operate their business. Calculating taxes for leftover inventory can be troublesome for a business owner, and we are prepared to address your tax concerns. The Cook CPA Group is here to address whether it is better to have more or less inventory once it is time to calculate taxes.

How Does Inventory Affect Your Taxes at the End of the Year?

The purpose of a retail company is to acquire inventory that is then sold to a consumer in order to turn a profit. Some retail companies may choose to only purchase inventory they know they will sell while others may stock up on a plethora of items that will likely remain at the end of the year. Whether you decided to purchase a limited inventory or purchased a large amount of inventory, there is a possibility you may have inventory left over at the close of the year.

The owner of a retail company should understand that there is a correlation between the amount of their tax bill and the amount of inventory remaining at the end of the year. The following are factors that are considered when determining taxes for leftover stock:

  • The annual sales of the business
  • The inventory at the beginning of the year, inventory added during the year, and inventory at the close of the year to calculate the cost of goods sold

Note, however, that there are other factors that may affect how your inventory taxes are calculated. For example, the business structure of your company could substantially affect how your taxes must be reported to the IRS and the California Franchise Tax Board. An individual operating a sole proprietorship may have to handle their taxes differently than a limited liability corporation. Our experienced accountants can help you determine how your business structure could affect your inventory taxes.

If you wish to know more about how to handle inventory taxes for your retail company, you should consult with an experienced Sacramento accountant for small and medium businesses.

How to Manage Inventory Taxes for Your Business

The primary way to determine the value of your inventory is to look at the money paid for the merchandise, and any inventory items that do not have value should not be considered as part of the inventory. The loss of revenue on inventory that is not sold would be calculated as a higher value of the inventory sold on a taxpayer’s returns. This means that a taxpayer would have incurred a cost on the item even though there was revenue associated. If the cost of goods sold is higher, a business owner may be eligible for a number of tax deductions. As the profits for a retail business decrease, the amount of taxable income will also decrease.

Generally, there are three methods that are used to calculated taxes for leftover inventory at the end of the year.

Cost-Based

Under this method of calculating leftover inventory, the items bought by a company are valued based on their price. Note, however, that transportation fees can also be included when valuing the total cost of the item. This is one of the most common and easy-to-use approaches for calculating taxes for inventory.

Retail

The cost of inventory is determined when a business owner sets the retail price of the item. The markup by the business is then subtracted from the retail value.

Lower of Cost or Market

Under this accounting approach, the cost of inventory items is compared to the market value of the item on a certain date. The value of the item on that specific date should be used to determine the cost of the item.

We understand that it can be difficult for a business owner to operate their business and stay up-to-date with a number of tax regulations. Fortunately, our experienced California accountants are prepared to assist you with your small business accounting to ensure you remain compliant with tax laws. We can help you determine what style of accounting will work for your unique needs. Do not hesitate to contact us to discuss your business services needs.

Work with Our Experienced California CPAs for Help with Your Inventory Taxes

If your business needs accounting help to calculate taxes for leftover inventory at the end of the year, you should contact an experienced Roseville tax accountant. The skilled accounting team at the Cook CPA Group possesses many years of combined accounting experience, and we would be honored to use this knowledge to provide the services your retail business needs. To schedule a free consultation to discuss the inventory taxes for your retail company, contact the Cook CPA Group at (916) 432-2218. You may also contact our accounting team online to schedule your free consultation.