Hello everyone and thanks for joining us today. My name is Phyllis Wischer and I am the Lead Business Coach at SageFire, Inc. - the creators of KeepMore.net. I am a Public Accountant with over 20 years experience in helping thousands of small business owners with their bookkeeping, accounting, payroll and tax needs.

SageFire is a Certified Solution Provider specializing in helping small business owners' track their business financial activity using our online accounting, contact management and document storage solution. Our solution, KeepMore.net makes it simple for you track your business while maximizing your tax benefits.

During today's session we are going to discuss:

• What does 'Cost of Goods Sold' (COGS) mean?


• Everyone looks at COGS differently - but everyone should follow the IRS guidelines on this subject


• How do you calculate "Cost of Goods Sold"?




• Beginning Inventory


• Purchases


• Other Costs


• Ending Inventory




• What does the IRS say about tracking inventory and Cost of Goods sold.

Later we will be going through an example that I hope will clarify the subject for you.

Before we go too much further, I want to remind you that I am not here to provide tax advice, just some basic information about calculating cost of goods sold. For your specific tax situation, I recommend you consult with your tax advisor.

So let's get started!

Let's talk about what costs are considered part of the cost of the goods that you are selling.

• Cost of the product or materials it takes to make the product, (includes freight when applicable)




• The cost of the product is simply the amount of money you paid to purchase the item or items that you sell on eBay.


• This can be the cost you pay as you go about each day currently buying items to sell on eBay, or


• If this is an item that you bought several years ago for personal use, it is the cost you paid for the item at that time




• If you cannot remember what you originally paid for the item, you might want to look on eBay for what a "used" item exactly (or very similar) to what you have is currently selling for on eBay and use that as a cost basis.


• The important thing in using this method is to not be over aggressive in your cost basis calculation as the IRS may want documentation of how you arrived as your basis for the cost calculation.


• I recommend that, if you do not have a receipt for the purchase of the item, you should document in your records how you arrived at your cost basis. Using our KeepMore.net e-Document Storage module to scan and store the documents you used for the cost basis calculation will help you store those documents in a safe and secure manner.




• If you purchase your items as you travel throughout the day at garage sales and flea markets, it might be difficult to get a receipt for price of the items that you purchase. You may want to keep a supply of receipt books and put the date, location, description and amount you paid for the items you buy. You might want to get a copy of any flyer or poster available to document the location of sale. You can get blank receipt books at any office supply store. Again, use KeepMore.net's e-Document Storage module to scan and store the receipt and other documents for proof of purchase in case of an audit.


• Tax Tip! - Don't forget to record your mileage as you travel around purchasing the items you sell on eBay.




• Cost of storage to store the product




• This cost may not apply to everyone. If you purchase items to sell on eBay and you also pay for storage to store the items until sold and shipped, the cost of the storage is 100% deductible. You simply record the cost of storage as an additional cost of goods sold.


• If you use a portion of your home as a place to store your goods, you may deduct the costs related to that portion of your home. If you would like more information about how to deduct the cost of storing goods at your home, I have available a worksheet that will help you better understand how to calculate this deduction and record it for tax purposes. To get your copy, just email me at phyllis@sagefire.com and request a copy.




• Cost of labor to produce the item




• This cost may not apply to everyone. The cost of labor to produce an item is the amount of money you pay for wages or contract labor to produce an item.


• If you are a sole proprietor - you cannot calculate the value of your time as part of the cost of labor.


• If you have cost to produce an item, you might want to consider speaking to a tax advisor to better understand what other costs related to labor and how to deduct those costs apply in your situation.




• Cost of overhead where the product is manufactured




• This cost relates more to the larger manufacturing type businesses; however, if it does apply to you, definitely talk to your tax advisor about this one.

Let's follow the format you will see on any tax form requiring calculation of the cost of goods sold. We will follow with a simple example.

• Beginning Inventory




• Beginning inventory is the "cost" of all items you have on hand at the beginning of the year.


• The beginning inventory amount should be identical to the closing inventory of the prior year. If there is a difference between the ending inventory and beginning inventory, a statement explaining the difference must be included when you file your tax return.




• Plus - Purchases (always remember to deduct the cost of items withdrawn for your personal use)




• You use the cost of all merchandise bought for sale to calculate purchases. If you make the items that you sell on eBay, this includes the cost of all materials or parts purchased for the items you make. If you are considered a manufacturer, please consult with a tax advisor.


• Trade discounts, cash discounts and returns and allowances on purchases are all considered a part of the cost of purchases. If your volume of business is large enough to include any of these items you should be consulting with a tax advisor on how to record these as part of your cost of goods sold.


• Items withdrawn from sale for personal or family use should be deducted from the total cost of your purchases. The cost of items used personally is not allowed as a deduction in calculating your cost of goods sold. Personal use items should be included under an account such as "withdrawal," "drawing" or "personal." In our KeepMore.net tool, you have an account already set up for you called 'Purchases - goods for personal use'.




• Plus - Labor costs (generally applies to larger manufacturing type companies)




• Smaller wholesalers and retailers (most eBayers) usually do not have labor costs that can properly be charged to cost of goods sold. Labor costs are usually an element of cost of goods sold only in a manufacturing business. Again, if you are considered a manufacturer, speak with your tax advisor.




• Plus - Materials and supplies (generally a manufacturing cost)




• You would include the cost of materials and supplies used directly or indirectly in manufacturing goods as part of cost of goods sold.


• Treat materials and supplies not used in the manufacturing process as a business expense and deduct them as business expenses at the time of consumption.




• Plus - Other costs (generally applies to manufacturing cost)




• Other cost would include such items as containers, freight-in and overhead expenses. Again, these cost normally apply to larger manufacturing businesses; and, if they apply to you, you should consult with your tax advisor.




• Minus - Inventory at the end of the year




• Inventory at the end of the year is also known as closing or ending inventory. The ending inventory will usually become the beginning inventory for the next tax year.


• Ending inventory is the "cost" of the items you have left at the end of the year available for sale next year.


• The calculation of the cost of items available for sale next year can be simple - the cost of a car that will be sold next year; or,


• The calculation can be complex as in our example above where you bought a whole houseful of small items at an estate auction and you still have some items left that you will sell next year. You should determine the cost when you purchase your items and document your calculations so that you can document how you arrived at the cost of inventory at the end of the year.
  o Ending inventory is simply the cost of the items you have available for sale next year.

If you maintain inventory, in the past you were required to report your income and expenses on an accrual basis - report income whether actually received yet (accounts receivable) and expenses whether actually paid yet (accounts payable). This created a burden on the small business owner like the average eBayer. So the IRS modified its rules.

Now, if your annual gross sales are less than $1,000,000, you can report your income and expenses on a cash basis - report income when actually received (ignore accounts receivable) and expenses when actually paid (ignore accounts payable).

However, you can not deduct the cost of the items purchased for resale if you have not sold those items at the end of the year (ending inventory). In this case, to calculate your cost of goods sold, simple subtract the cost of the goods not sold at the end of the year from your total purchases for the year. Again, document your calculations and scan them in our KeepMore.net e-Document Storage module.