ForumsTaxes and Payroll

Hi, and thank you for your response. I do not have an accountant yet. I just started my business in Nov-Dec of '07 so I'm trying to do this on my own and then maybe next year I could justify the expense.

I'm mainly just trying to figure which is the best way to go for me; accrual vs. cash and I know I need to choose wisely. I have read that if you have inventory, you must do it the accrual way but my inventory amts. to less than 200.00.

jules

Gross Income = Total Sales (receipts) MINUS Cost of Goods Sold MINUS Returns.

So your gross income should be a positive number (if it isn't, it means you're selling your product for less than the cost of all the components you buy to make it, or that you have a lot defects/returns -- neither of which is good business). You deduct your total business expenses from your gross income to get your net profit or loss. Obviously, that can be a negative number, but to qualify as a business (as opposed to a hobby), you have to show a profit periodically -- you can't show a net loss year after year.

You tax return will have a box to indicate that it's the business' first filing, so you can assume on your first "official" day that the business had no inventory. If you (personally) did have inventory (supplies and materials that were used to make the products you sold), then you need to account for how you transferred them to the business (the easiest way is if the business bought them from you at actual cost on the second "official" day).

Note that any tools or equipment you owned personally and transferred to the business also have to be accounted for (not as part of Cost of Goods Sold, but as capital expenses or deductible start-up costs). If any of these assets is depreciable, things get more complicated -- back into tax pro territory (at least, for me) . . . A lot of "craft" type small business owners elect not to do this because such tools are not usually subject to property tax when they are personal possessions, but may be assessed as taxable property by state/local jurisdictions if they are part of the business' assets.

I hope all that was clear and useful.

No, labor within the Cost of Goods Sold calculation is what you pay employees who spend all of their time fabricating raw material into a finished, sellable product -- it generally only applies to manufacturing and mining companies. If you pay yourself a salary (or pay wages to employees), it's an operating expense.