As a wholesale distributor your inventory is your business. It is your life line to your customers. It is your bread and butter. It is your profit. Unfortunately it is also your most significant cost. Sometimes that cost can become overwhelming and hard to manage. But, a recent article I discovered, which can be found here, revealed another reason why keeping track of your inventory cost is so crucial to the success of your business. Reducing your inventory costs can significantly reduce how much you pay in taxes each year. It is not too soon to be considering how you can prepare your business for the taxing times ahead!
In this blog post, I want to highlight some of the methods the article written by Kevin Johnston of Demand Media brought up on how to keep track of the cost of your inventory. Keeping track of the cost is so crucial because it allows you to reach a profit figure. This is the physical value you are taxed on each year. The article discusses 5 methods for reaching the profit figure:
This method involves multiplying your average markup percentage by the amount of inventory you have on hand. Subtract this figure from the total retail value of your inventory. This will show you your cost of goods in your inventory.
Inventory as Part of the Cost of Goods Sold
As Kevin Johnston put it, “Your expenses for goods come off of your taxable income. The inventory you have on hand is one of those expenses. Schedule C from the Internal Revenue Service provides you with a worksheet for including inventory as part of your cost of goods sold. Enter your cost, using the retail valuation method on line 41 of part 4 on Schedule C.”
Previous Year’s Inventory
You can look to the past. You can use your end of year inventory from the previous year. This will give you a general idea of what your taxes may look like this year
Add Other Goods Costs
This method uses the past and a little bit of math. Take all of your costs of goods and simply add it to last year’s inventory. This gives you a number to work with.
Subtract Your Current Inventory
This method involves using your previous taxes and your current inventory. As it is stated in the article, “When you subtract the value of your current inventory from the total you wrote on line 41 (last year’s ending inventory plus all other inventory costs), you have a cost of goods sales figure. This is how much it cost you for inventory to achieve the sales you had in the tax year.”
These are just 5 methods to discover your profit figure and keep track of your inventory cost. Having this knowledge, according to the article, can help you reduce the cost of your taxes on your inventory by 88%. As Ben Franklin said, “Nothing can be said to be certain, except death and taxes.” I would be interested to know other methods you may use or your thoughts on how your inventory effects your tax costs and benefits each year.