Taxes.....Expensing Materials?

Peter Atwood

Peter Atwood

Joined
Oct 26, 2000
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Do you guys expense your materials as you use them or do you write them off for the year regardless if they still are sitting on the shelf? I'm trying to get myself a little better set up this year and my accountant is giving me a hard time about doing it right. So, anyone who is doing knives full time or at least enough to report the income, if you could shed any light on this it would be much apppreciated. :)
 
this may be limited to Maine. ??
and there are two way to figure I forget the terms for them but this is some of what I do.
If you buy it for knife making and it will be sold in the form
of a knife or related then it's deductible and
should be tax free when you buy it.
but when you sell it
in the form of a knife it
becomes part of the finished product and it ( the whole Knife)
is taxable to your customer, and it should not have been sold at a loss, you have so many years
to turn a profit also.

if it's on the shelf you have to inventory it, to account for it
if you used it for your taxes,
in case the little guys with the big suits come looking for you.
keep your records for at least 7 years. this is just a little of Maine law.
you have many other deductions you can take too.
car expense or Mileage one or the other
if used mostly for the business the law will tell you just how much
in your state.
if your phone is listed as your business yes.
part of your house taxes, ele, if you have 5 rooms in the house
and you use one for the office 1/5th of most the expenses are
deductible. there is much more you can do why not do it..?
 
I guess it depends on how long you've had your materials.

FIFO: First In First Out
Works best if you're turning stuff fast because you end up with the most expensive stuff for next year.

LIFO: Last In First Out
Works best if your supplies are mostly old and the new stuff cost a lot and you want to minimize your income (decrease tax liability) by having a big Cost of Goods Sold expense this year.

Thing to remember is you can't change from one year to the next - you'll have to pick what you want for this year and stick to it.

LIFO is a good first year gambit and lets you have the larger expense now, and that's true every year.

It means the supplies on your shelf are always the oldest ones you have, and therefore the cheapest.

(Keep in mind this is only a paper distinction - no one knows when you bought the actual stuff you're using. This is only a receipt thing.)

You should keep all your receipts! IRS doesn't audit many people in low income brackets (why bother?) but there is a random element that can make you very unhappy. Always be conservative in your tax returns. The ideal would be to have an IRS audit and have them owe you money... Pretty unlikely though. :D

If this doesn't make sense I apologise, real tired today...

Dave
 
What I'm wondering is if I bought a sheet of titanium this year can I not expense it all until it is used up? I did an inventory of all the materials I have on hand and now I'm trying to figure out what I can and cannot expense for the year. I'd liek to set this up so it is easy but that may mean that I have to bite the bullet this year and make it complicated so that next year it is all set up and much easier......
 
ANy accountants in the hopuse?

I'd think your acccountant should know or be able to find answer to this question, kinda what we pay them for.

I was planning on just putting anything I bought last year as part of last year, even if it's raw materials still sitting on shelf(well, leaning against wall) now. SO I'm at a loss for the year. WIll mean I"ll turn a profit this year(I'd hope :) ) without the related materials expnses,s but sorta skews one way one year, other way the other year, and balances out. SO don't worry too much about it messing me up.

But then I'm also only a part time maker.
 
For my fulltime work, I know the accountant wants stuff expensed and recorded the year we purchase it. Technically, it's an expense for that year - even if you use it later. We've done this in the past with buying large lots of wood and using them later. I would think it would be this way across the board (no pun intended). After all, the record of your expenses (receipts) lists the date they were purchased, not the date you used them.

Tim

As an aside not, it's hard enough record keeping expensing stuff the year you buy it. I can't imagine keeping track of something to expense it a year or two later....
 
depreciation on big tools work that way Tim
I deduct for the year the date on the receipt says as
long as it's paid for and not on open account some where
then it has to be deducted the year you pay for it.

once you use the rest and add it in to your price the IRS will get there share ...
 
In my case an increase in inventory value, either raw materials or finished goods, is taken the same as earnings. (the company is seen as having earned that money and is retaining it in some form instead of paying it out)
 
right on George
the inventory is considered an asset for sure..
If you use ( materials bought) as an expense
you'll have to inventory it,
you will have to account for it (some what) in case you get a visit,
but in the nature of waste you'll have some fudge room.

as far as unsold knives in stock go if you don't have many
who knows?
they know (the IRS) when it is sold of course with a paper trail
they will get a return in the form of tax when sold anyway ..

I've been 100% self employed for over 16 years now
and no visits yet but you never know...
 
Yes there is a bookkeeper in the house -
As said elsewhere it depends - tax wise - on whether you keep your books on a cash basis or an accrual basis. Most small businesses who don't keep an inventory of goods are most likely on a cash basis - ask your accountant Peter.
If on a cash basis than all cash expenses - not charge expenses - are accrued at the time of purchase. Technically all materials used specifically for the manufacture of an item such as handle material, that sheet of titanium. blade steel, etc. is known as a Cost of Goods Sold. All of your grinding belts, buffing compounds, etc. are considered shop expenses.

As to depreciation - most small makers can take advantage of Federal Tax Section 179 to depreciate in full their large amount tool purchases. In tax year 2003 this amount has increased to $100,000.00.
 
Old law:

Federal tax law states that if inventory (including raw materials) is an "income producing factor" it should be accounted for as inventory, and sales and cost of sales must be "accrual basis."

New law:

Small businesses may be cash basis, but you still must match the cost of the inventory to the year of the sale.

Inventory does not mean supplies - in the case of knife making I would think it would be the medtal for the knives, the handle material, etc.

Regarding expensing assets - you do not need to wait for an equipment purchase to be paid for to take the Section 179 expnese deduction. As long as the asset is "placed in service" prior to the end of the tax year, you can take the deduction, regardless of when it is paid for. In effect, for the purchase of equipment even cash basis taxpayers are treated as accrual basis.

Keep in perspective that Federal tax law generally governs for tax law, not state law. (exceptions include divorce and community property laws).

The above sets forth the "theory." In actual practice most small manufacturers ignore the law and use pure cash basis, or some hybrid method. The cost benefit aspect of accounting for invenory is a paid in the ass and not realistic for the average very small business.

Hope this helps.

Ed
Practical Use
Certified Public Accountant
 
I would hire a good accountant in your area, and let them fret the books for you. I have had 3 businesses that I have started and sold over the years, and have never regretted hiring an accountant to worry for me. Make sure he has been dealing with small business in your area for some time, and his references will back him. I would worry more about the STATE guys more than the FEDS, as state tax law is different from one place to another as is county and city.

The FEDS will be watching whether you do it right or not, but a good accountant can help defend you if needed.

Doc
 
Although I am not a practicing accountant by occupation, I do have a minor in accounting. I concur wholeheartedly with what Ed says. Inventory may only be claimed in the year it was purchased.
 
Thanks for all the replies, Ed and Jeff in particular! I think that just may clarify it for my accountant (the wife).....and a damned good business person she is too! ;) I think she may not have been aware of the change in the rules though.......So I MAY take all that titanium sheet, the steel, the folder parts and the wood this year? Whether it is used up or not? That's what it sounds like to me.....I'm still going to be more diligent about keeping the records up to date this year and I'm splitting out the materials and the supplies......
 
No, even cash basis you can deduct the costs of raw materials only in the year sold (the law). My practical solution is take them anyway, as long as it does not, "materially distort income."

Ed
 
if I paid for it in 2003 then I turn it in in 2003
if it's still in inventory my accountant knows the cost of my inventory also
I let him work his magic..
I told him, if he doesn't become a mechanic
I won't become an accountant:D
 
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