# Help me understand inventory for tax reasons?



## wooleybugger74 (Jun 17, 2012)

Hi all,
this is my first real fiscal year for my clothing line. Last year my H&R Block accountant told me, from now on, I should be accounting for end of year inventory. I never really thought to ask why. As I searched through threads on this forum, (always super helpful and usually leaves me with even more questions  it seems that there is a difference between supplies and inventory. Based on whether the blank has been embellished?
I print on demand only, transfers, so I never have any stock of printed T shirts, but I have hundreds of blanks, and thousands of transfers. I was planning on reporting everything as supplies.
Is there a good resource out there for helping me understand this? Preferably something specific to t-shirt producers? Any help would be appreciated, but a tutorial would be greatly beneficial. 
Thanks,
Dave


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## binki (Jul 16, 2006)

Get a real CPA and dump the blockheads. You will surprised at the difference in your tax return.


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## 4 the Team (May 31, 2013)

Treating the blank tshirts as supplies will never allow you to get an acurate picture of your business and may bite you in the butt in future tax years. Supplies are items like tape for the screens, emulsion, even ink can be considered a supply, but the blank tshirts should be considered inventory. Here is an example. In December you get a great deal on tshirts so you buy 10,000 at 1.00 each. You cconsider them to be supplies so you write off that 10,000 in year one. Your expenses for year one are actually inflated so you show less profit. (Not great if you need a loan, etc.) Year two you sell all those tshirts. But you have no expense to book against that sale so it is all profit. (Hello tax bill) and again your books are not accurately portraying what is really happening in your business.
Same scenario but tshirts are inventory....
You buy the tshirts and the inventory shows as an asset on your books. Year two when the tshirts are sold, they come out of inventory and are expensed against the income from the sale.

That would be the proper way to treat the blank goods if you carry stock. If you only order what you need for each job at the timeof the job then expensing them as supplies or inventory won‘t make a difference.


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## Ripcord (Sep 2, 2006)

The reason for reporting beginning and ending inventory each year is to keep an accurate record of what you bought (tax deductible) and what you used.

So if you bought 1,000 blank shirts during the last week of December but only printed 50 of them before Jan 1, you deduct the cost of the 1,000 from your gross income as materials, but you need to account for the 950 you have left in stock as year end inventory, which will adjust your total deduction. If you use them up the next year they will reflect again upon your inventory, so you get the tax deduction during the year they were used, not the year they were purchased.


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## wooleybugger74 (Jun 17, 2012)

Thanks guys.
So then do I report them as a lump sum? Tally them up by the price I paid for them as one sum cost?
Transfers, too?


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## 4theTeam (Feb 21, 2011)

wooleybugger74 said:


> Thanks guys.
> So then do I report them as a lump sum? Tally them up by the price I paid for them as one sum cost?
> Transfers, too?


For tax purposes it would just be the total. Transfers too.

You should know piece price for your records so that you know what your cost is when you sell them. Do you have an accounting program like quickbooks? It is very beneficial to keep track of the stuff. I have a retail shop so I use quick books Point Of Sale - it tracks my inventory and updates the Quickbooks Master file for me.


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## leamsi4ever (Jul 5, 2011)

I don't mean to hijack this thread but I am in a similar situation. I want to keep the shirts as inventory items but should I do the prints too? I have thousands (in gang sheets) and I usually get a different price depending on the qty I order so It would be hard to keep an accurate count and cost of each, can I at least do the transfers as an expense?

Also, how do I "transform" a blank Tee into a printed one? I need to subtract inventory of the blank, then add cost to it (labor, heat transfer etc) then add back into inventory as a new item.
Can I do this in quickbooks? Which version? Or is there other software that can handle that?


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## Posylane (Mar 3, 2011)

This question is getting made way more complicated than it is. What do you report to the government?

Your sales - and inventory has nothing to do with your sales.

And your expenses. And inventory by itself is not an expense - it is an asset. Supplies are expenses, but if you had a warehouse of them, they too would be assets.

If had to write down the value of your inventory, you could expense part of that, but that is not normally the case for folks like us.

In a business where all profits are re-invested into expanded inventory, you are likely to owe taxes even though you don't have any money and didn't take any money out of the business.


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## jeannekay (Mar 19, 2012)

If you have inventory (shirts) that you bought lets say in 2015 and didn't use all of them so counted them in your inventory at the end of 2015. Then in 2016 you still didn't sell all of them, some but not all, do you count those again in your 2016 inventory?


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## NoXid (Apr 4, 2011)

jeannekay said:


> If you have inventory (shirts) that you bought lets say in 2015 and didn't use all of them so counted them in your inventory at the end of 2015. Then in 2016 you still didn't sell all of them, some but not all, do you count those again in your 2016 inventory?


Inventory matters for calculating Cost Of Goods Sold (COGS), but does not matter beyond that.

+ Beginning Inventory
+ Inventory You Bought During the Year
- Ending Inventory
= Items Sold & Shrinkage (waste, theft, samples, etc)


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## sben763 (May 17, 2009)

NoXid said:


> Inventory matters for calculating Cost Of Goods Sold (COGS), but does not matter beyond that.
> 
> + Beginning Inventory
> + Inventory You Bought During the Year
> ...


Not exactly. This is a state by state basis. At one time here we were taxed on inventory. IN years ago did away with inventory tax and how it’s handled. There are still states that do inventory tax so it’s best as ask someone experienced with your states tax laws.


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## NoXid (Apr 4, 2011)

sben763 said:


> Not exactly. This is a state by state basis. At one time here we were taxed on inventory. IN years ago did away with inventory tax and how it’s handled. There are still states that do inventory tax so it’s best as ask someone experienced with your states tax laws.


True, true. Lots of variation on things state to state.


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## hongfunclothing (Oct 16, 2014)

Inventory tax?
I never heard about that in China


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## binki (Jul 16, 2006)

hongfunclothing said:


> Inventory tax?
> I never heard about that in China


Yeah, don't come to the USA. It is crazy out here.


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## UTIclothing (Oct 1, 2007)

If your sales are less than $1M per year, you are not required to have inventory and can list t-shirts under your "supplies" expense


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## sben763 (May 17, 2009)

UTIclothing said:


> If your sales are less than $1M per year, you are not required to have inventory and can list t-shirts under your "supplies" expense


Maybe in your state. Some states have inventory tax, if you have 10 shirts in inventory it would be taxed. My state did away with inventory tax many years ago. If one still carries inventory here we still have to list it as can’t write it off till sold. 

We have business personal property tax and up until last year I had to pay tax on press, dryer and about everything in shop. Now $20,000 minimum for personal property tax. 


It’s best to get advice from a CPA in your state.


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## splathead (Dec 4, 2005)

And even within a state that may not tax inventory, a city or county in that state might. 

It really boils down to not just federal or state income tax laws, but local ones too.


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## binki (Jul 16, 2006)

In California you will pay the county a tax on FFE + Supplies but not inventory. That is every year based on their assessment of value.


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