Business Question - Inventory, Taxes, Etc.

[Eldorado]

Folks,

Not sure this is in the right forum location, so bear with me.

I just finished my first walk through of my taxes, having completed my first year of my leatherworking side-business. Not unexpectedly, I ended up with a loss. Not alot of sales against a decent amount of buying leather, liquids, tools, etc. I don't mind the loss at this point.

Here is the real question, Turbo Tax took me through a series of questions regarding inventory, cost of goods sold, and varous expenses. I found that in our business, the question of inventory seems a tricky one. Most of the finished goods I have on hand are prototypes -- for display online and so that customers can say, "I want that one in this color, with this design". So that leaves me with a mix of hides, double shoulders, a mess of different dyes, and such. I don't think any of us gets 100% use out of every hide, and the useable amount remaining after we cut into it is almost impossible to figure. Same is true of a 3/4 full jug of dye. So, how do you all value your materials inventory in a meaningful way? Do you just estimate it?

It seems like a problem almost unique to our industry, since if we were cutting this stuff out of vinyl, we'd know how many useable yards were left. With leather, its hard to figure what's, "left on the roll", so to speak. Any thoughts are welcome.

Thanks in advance.

[radar67]

When I get my leather in, I figure how many square inches I have. When I cut a pattern out, I figure out how many square inches I charge out. ie, if I cut a 10 inch circle out of the hide, I figure a 10 inch by 10 inch square of material to cover the waste. Now, I may be able to use some of that waste for a key fob or something. Those piece I get out of scrap are figured the same way as far as charging out of the cost of material, even though they have already been "paid" for. It works for me.

As for the liquids, I figure .25 per unit of dye, clear, paint, etc that is used. If an item has 2 dye colors and two coats of clear, it gets charged 4 units. That makes my liquids more than pay for the cost of the bottles. I haven't really figured out how many units I get out of a bottle, so don't really know how to count it in inventory. If you have 3/4 of a bottle, count it as .75 in the inventory.

[Sylvia]

I would probably approach this a bit differently from the others.

Cost of goods sold should include.

Labor, materials, advertising (website), trips to shows, etc.

But rather than charging by the square inch or by the unit, I would weigh my leather and my dyes when I first get them. Then divide that by the $$ paid (including shipping) and then after each cut or dye job I would weight them again.

Then make the units and such in your spreadsheets. Debiting and Crediting as new inventory comes in and leaves as finished goods.

I highly recommend that you take a bookkeeping class or a first year accounting class.

[bruce johnson]

Folks,

Not sure this is in the right forum location, so bear with me.

I just finished my first walk through of my taxes, having completed my first year of my leatherworking side-business. Not unexpectedly, I ended up with a loss. Not alot of sales against a decent amount of buying leather, liquids, tools, etc. I don't mind the loss at this point.

Here is the real question, Turbo Tax took me through a series of questions regarding inventory, cost of goods sold, and varous expenses. I found that in our business, the question of inventory seems a tricky one. Most of the finished goods I have on hand are prototypes -- for display online and so that customers can say, "I want that one in this color, with this design". So that leaves me with a mix of hides, double shoulders, a mess of different dyes, and such. I don't think any of us gets 100% use out of every hide, and the useable amount remaining after we cut into it is almost impossible to figure. Same is true of a 3/4 full jug of dye. So, how do you all value your materials inventory in a meaningful way? Do you just estimate it?

It seems like a problem almost unique to our industry, since if we were cutting this stuff out of vinyl, we'd know how many useable yards were left. With leather, its hard to figure what's, "left on the roll", so to speak. Any thoughts are welcome.

Thanks in advance.

I assume you are taking about the COGS sold inventory part on your Schedule C and not estimating pricing. When I was setting up the book keeping my advisor told me it was not as important exactly how you count the beans or which ones as long as you count them the same way from year to year. YMMV. I keep separate sheets on the things I choose to inventory. Each weight and type of leather has its own sheet. Same with things like dye, oil, and conditioners. I inventory my leather by the sq ft on the invoices. At the end of the year I eyeball how much I have left and count that. On liquids I go by the half bottle. If it is less than a half I don't count it. Hardware like saddle dees, I count by the piece. Small parts like rivets are turned over several times a year so I don't count individual nails or Chicago screws. I just count those purchases for the year.

[KAYAK45]

After say 30 years as a tax CPA. let's get real on "inventory" I've worked with CARHART, MICROSOFT, IBM, BOEING ETC,ETC,ETC.

If it's open, it's gone! done! CapputT!

Count only closed, new material.

[bruce johnson]

I sure like Kayak's system, that simplifies things a lot. One thing I'd say about me keeping track of the "big ticket" items is that it keeps me closely in tune with price changes in those materials throughout the year. That helps in a couple ways. It helps me figure my pricing for finished products. Also I get an idea of trends on how much of something like glue or oil I use in a year. Is it worth buying by the gallon or the quart next time, case or singles? I probably have about 40 individual things I keep track of, so it is not all that hard to keep current on.

[Spinner]

Something else i was told by my CPA relative on tracking large inventory items like leather is to figure out how many of your products you can get out of it. For me, I know I can get 5 tank bibs and 3 fender bibs max out of a single hide due to their odd shapes (works out to 80% of most 24-25 sq.ft hides) and that's being creative/generous due to quality/grain/imperfections. Any area of the hide you can't use for business purposes is considered waste and thus written off. Yeah, I could probably get a few key fobs, etc. out of it but i don't make those on a normal basis so the scraps go into bins & bags for my nephew, the local scout troop or friends who can use them.

[DanTheMan]

Eldorado-

From a tax standpoint a loss is a good thing. You will pay taxes on the profit when that occurs. I do not use Turbotax so I can only make an assumption about the inventory questions. I do know Turbotax walks people through step by step. With that said, I would bet Turbotax is asking those questions to calculate Cost of Goods Sold(COGS). The formula is Beginning Inventory + Purchases - Ending Inventory = COGS.

[DanTheMan]

I didn't see an edit button to add this to my prior post so here it is. You mentioned that your finished goods are used for display. If you do plan to keep them and use for display then I would not include them in inventory. I would expense those amounts as a selling expense. For the items that are not full/complete, I would use a reasonable estimate. The key is to be reasonable. You could also expense your scrap. For example, if a hide has a measurable amount to get a reasonable estimate of the value being discarded. I am just a hobbyist and do not do this for a living. I work in accounting and wanted to share my thoughts. Good Luck!

[Double U Leather]

AAARRRGGGGHHHHHH....This makes my head explode! I'm just in the process of getting all of the "business" stuff put together at the request of my wife. I'd being doing my leather stuff as a cash only type thing forever. And now, she thinks that since I'm churning out quite a few projects of the upper end variety, I need to be "legit" in the eyes of the government. The good news is that she understands all of this COGS stuff and quarterly taxes and inventory and blah, blah, blah. I told her that since she understood that part, she was in charge of it! I would continue to take care of doing what I understand....beating on dead cows! Anyway, this is interesting stuff and I hope she will remain gung-ho counting the beans. I'm not really much of a bean farmer!!

[KAYAK45]

I could write a book about this stuff! Back offffff!

Your schedule C is an "estimate". The actual,true absolute, numbers are a fallicy!

No amounts are "accurate".

You drove more or less miles for business. Make a fair guess.

You used $xxx electricity, divided by y months? times "w" rate times # of light bulbs equals....;..good guess!

The IRS agents are good folks too. If..your are fair.. if you use DUE DILIGENCE and have a real business.. do not worry.

Inventory will work out over a say two /three year period to be exactly correct. On any one day it's wrong! No matter how you do it.

Use really good guesses!

Kevin

[Russ]

Eldorado;

Didn't TurboTax tell you that you didn't have to report inventory if:

Leather Products Manufacturing Important: You are not required to report inventory if either of the following apply:You had less than $1 million in sales or receipts in each of the last three yearsYour business is primarily providing a service, rather than selling a product

Of course, if you hit the $1 million in sales receipts, bully for you. Perhaps it shouldn't be a side business

Naturally, there's some tax benefits to reporting the expense of COGS, but maybe it's not worth it if yo try it both ways.

Russ

Folks,

Not sure this is in the right forum location, so bear with me.

I just finished my first walk through of my taxes, having completed my first year of my leatherworking side-business. Not unexpectedly, I ended up with a loss. Not alot of sales against a decent amount of buying leather, liquids, tools, etc. I don't mind the loss at this point.

Here is the real question, Turbo Tax took me through a series of questions regarding inventory, cost of goods sold, and varous expenses. I found that in our business, the question of inventory seems a tricky one. Most of the finished goods I have on hand are prototypes -- for display online and so that customers can say, "I want that one in this color, with this design". So that leaves me with a mix of hides, double shoulders, a mess of different dyes, and such. I don't think any of us gets 100% use out of every hide, and the useable amount remaining after we cut into it is almost impossible to figure. Same is true of a 3/4 full jug of dye. So, how do you all value your materials inventory in a meaningful way? Do you just estimate it?

It seems like a problem almost unique to our industry, since if we were cutting this stuff out of vinyl, we'd know how many useable yards were left. With leather, its hard to figure what's, "left on the roll", so to speak. Any thoughts are welcome.

Thanks in advance.

[Eldorado]

Thanks everyone.

You've all given me alot to think about, and thanks for the quick responses. It sounds like I need to get a tad more specific about inventory and tracking, but it also sounds like good estimates are good enough. I'll have to give the details of this some thought. Pretty much everything I do is custom and often for the first time. That makes knowing whether I have useable pieces in scrap a little more difficult.

Interestingly, my primary job is as an auditor, so I have a bit of understanding of these things. However, its kind of interesting, fun, and frustrating (all at the same time) that doing this stuff at a corporate level doesnt seem to help me much at the small business level.

Any additional insights are definitely welcome.