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jrfarrow
September 9, 2022
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How do you find cost of goods for tax purposes

  • September 9, 2022
  • 2 replies
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I've seen web pages like this which explain the specific understanding of costs of goods as it relates for tax purposes but I cannot find anywhere how to find this number using quickbooks:

 

https://quickbooks.intuit.com/r/bookkeeping/cost-of-goods-sold/

 

By the way, I am using quickbooks pro 2011 on my desktop but I imagine the reports are similar. I am tracking inventory.

 

My accountant has been using this method:

 

Inventory asset on balance sheet at beginning of year - Inventory asset on balance sheet at end of year + cost of goods shown on the p&l report for that year.

 

I think this is not correct because cost of goods on the P&L report would include all items sold that year, including items that you owned from prior years and so you are counting the cost of goods for those items twice.

 

What you need is the cost of goods sold of items purchased and sold only in that tax year.

 

Was looking at other reports and noticed the income tax summary report which includes the line "Purchases, costs of goods". Does anyone know, is this number the same as cost of goods sold in the p&l or is this the number I'm looking for?

 

Thanks,

 

    Best answer by Rainflurry

    @jrfarrow 

     

    Specifically, that last sentence, my first thought is you mixing the notion of COGS as defined by the tax man and COGS as calculated by QB shown on the P&L statement. Am I right? I don't think the COGS as presented in the P&L will help you calculate COGS for tax purposes.

     

    Yes, you're right.  When you file your tax return, COGS is a calculation on form 1125-A or Sch C for a sole proprietor.  That calculation is beginning inventory (BI) + purchases (P) - ending inventory (EI), so COGS = BI + P - EI.  As long as you provide 3 of the 4 variables to your CPA, then the COGS section of your return can be completed.  A lot of businesses know their COGS, BI, and EI and then solve for P.  So, it doesn't matter whether you provide your COGS or P to your CPA.  If you book all of your inventory purchases to an inventory asset account, then you can run a report to find P as well, but it isn't necessary because the cost of that purchased inventory either ended up being expensed to COGS or remained in EI, both of which you have provided to your CPA.

     

    To summarize, yes, you're correct, the COGS from your P&L will not help you calculate the COGS for tax purposes because the COGS on your P&L is the same as your COGS for tax purposes.  I just meant to point out that the equation from your CPA in your original post (BI - EI + COGS from your P&L) does not give you COGS for tax purposes.  I don't know what that gives you.  

    2 replies

    R
    RCV
    September 10, 2022

    Let me share some information on how QuickBooks Desktop handles the cost of goods sold, jrfarrow.

     

    When you set up your first inventory item in your Inventory List, QuickBooks automatically adds two accounts to your company file's Chart of Accounts. These are the following:

     

    • 12100 - Inventory Asset - Other Current Asset
    • 50000 - Cost of Goods Sold (COGS) - Cost of Goods Sold

     

    Each inventory item requires an income account and you can set up your accounts or subaccounts. The inventory COGS is only affected when you sell inventory items on invoices or sales receipts. When you sell an inventory item, we'll need to run the Transaction Journal Report for the invoice/sales receipt and you see the Sales/Accounts Receivable transaction. Then, you'll see the Inventory/COGS transactions which credit the Inventory Asset account and debits the COGS accounts.

     

    Also, the Cost of Good Sold (COGS) will only be realized when the item is being sold out. This account isn’t meant for the items you use to create your products, such as raw materials. To know if the number is the same as the cost of goods sold in the report or if is this the number your looking for, we'll need to run the Profit and Loss report to show the COGS. From there, double-click the amount to see the transactions. Here's how:

     

    1. On the Profit and Loss report, click the amount next to the Cost of Goods Sold account.
    2. Click the entry to open it.
    3. Go to the Reports tab, then click Transaction Journal.

     

    I've added the Customize company and financial reports link to help you easily get a view of how well your business is doing. I'm also adding this article for your reference: Understand inventory assets and cost of goods sold track.

     

    Let me know in the comment section below if you have any other questions. I'll be always around ready to help. Have a great day ahead. 

    Rainflurry
    Rainflurry
    September 11, 2022

    @jrfarrow 

     

    COGS is the cost of items sold during a given year regardless of when they were purchased.  For example, say you bought a $100 (cost) item in 2019 but didn't sell it until 2022.  When you purchased it in 2019, it should have been booked to inventory (an asset account on your balance sheet) where it sat until it was sold in 2022, at which point, inventory would be reduced by $100 and COGS would be increased by $100.

     

    If your CPA is telling you that COGS = Beginning inventory - ending inventory + COGS from P&L, that's a problem.  COGS = beginning inventory + purchases made during the tax year - ending inventory.  Or, your CPA can back into purchases from knowing the beginning inventory, ending inventory from your balance sheets and COGS from your P&L.

     

    If you want a good understanding of how to calculate COGS for tax purposes, look up IRS Form 1125-A. 

    J
    jrfarrowAuthor
    September 12, 2022

    Thanks for the reply Rainflurry, If I could examine your statement:

     

    "If your CPA is telling you that COGS = Beginning inventory - ending inventory + COGS from P&L, that's a problem. COGS = beginning inventory + purchases made during the tax year - ending inventory. Or, your CPA can back into purchases from knowing the beginning inventory, ending inventory from your balance sheets and COGS from your P&L."

     

    Specifically, that last sentence, my first thought is you mixing the notion of COGS as defined by the tax man and COGS as calculated by QB shown on the P&L statement. Am I right? I don't think the COGS as presented in the P&L will help you calculate COGS for tax purposes.

     

    Using your example, if that was the only item you had in inventory and you didn't make any other purchases in 2022, then:

     

    beginning inventory: $100

    Ending inventory $0

    COG from P&L report $100

     

    We know the correct number for Cost of Goods for tax purposes is $100. You can see that if you try to use the COG from the P&L to calculate this number then you will be counting the cost of the item you sold twice.

     

    Where is the report that shows the cost of inventory items purchased during a tax year?

     

    Am I missing something? Doesn't everyone have this issue?

     

    Rainflurry
    RainflurryAnswer
    September 12, 2022

    @jrfarrow 

     

    Specifically, that last sentence, my first thought is you mixing the notion of COGS as defined by the tax man and COGS as calculated by QB shown on the P&L statement. Am I right? I don't think the COGS as presented in the P&L will help you calculate COGS for tax purposes.

     

    Yes, you're right.  When you file your tax return, COGS is a calculation on form 1125-A or Sch C for a sole proprietor.  That calculation is beginning inventory (BI) + purchases (P) - ending inventory (EI), so COGS = BI + P - EI.  As long as you provide 3 of the 4 variables to your CPA, then the COGS section of your return can be completed.  A lot of businesses know their COGS, BI, and EI and then solve for P.  So, it doesn't matter whether you provide your COGS or P to your CPA.  If you book all of your inventory purchases to an inventory asset account, then you can run a report to find P as well, but it isn't necessary because the cost of that purchased inventory either ended up being expensed to COGS or remained in EI, both of which you have provided to your CPA.

     

    To summarize, yes, you're correct, the COGS from your P&L will not help you calculate the COGS for tax purposes because the COGS on your P&L is the same as your COGS for tax purposes.  I just meant to point out that the equation from your CPA in your original post (BI - EI + COGS from your P&L) does not give you COGS for tax purposes.  I don't know what that gives you.  

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