Topic: Member Workshop: Cost of Goods and Inventory – how these affect your eBay business
Host: keepmore/sagefire Date: Wednesday 04/16 Time: 12:00 p.m. to 1:00 p.m. Pacific time Location: Workshop Board
Description: Please join Phyllis Wischer, Business Success Coach at SageFire, Inc., Certified Provider of KeepMore.net, for a thorough discussion of Cost of Goods Sold (COGS) and Inventory; and how recording and tracking these affect your eBay business. Are eBay Fees, PayPal Fees and shipping costs to the buyer considered COGS? Please join us as we discuss this and many other important issues surrounding Cost of Goods Sold and Inventory.
We love workshops to be interactive, so please feel free to ask your questions that directly relate to this topic.
Added note: If you click on the "Watch this discussion" link, you will receive an email each time someone posts to the workshop.
Stop Watching: If at any time you no longer want to receive updates on a thread you are watching, just click on the link titled "Stop Watching Thread" found in the specific thread being watched. Also you can remove any watched thread by clicking on the "Watched Discussions" link located in the log in bar and deleting the watched thread.
If you're new to the discussion boards, please be sure to check out the board tutorial:
A note from our Legal Department: The statements and opinions made in this discussion board are those of the workshop host only and do not reflect eBay policy or eBay's opinion with respect to such statements.
Hello everyone and thanks for joining us today. My name is Phyllis Wischer. I am a co-founder and Business Success Coach for Certified Solution Provider SageFire, Inc. - 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.
As a Certified Solution Provider, SageFire specializes in helping small business owners’ track their business financial activity using its 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.
Everyone looks at COGS differently – but 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?
Why is it important to know your COGS?
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.
As an eBayer, you purchase and sale merchandise, or you produce and sell merchandise, and that merchandise is probably a significant income-producing factor for your eBay business. The merchandise that you sell must be accounted for as ‘inventory’. The cost of your ‘beginning inventory’ (the cost of the items left unsold at the end of the prior year) plus the cost of all purchases during the year minus the cost of your ‘ending inventory’ (the cost of the items left unsold at the end of this year) is used to determine ‘the cost of the goods’ that you sold during the year. See the section ‘How do you calculate “Cost of Goods Sold” below for a more concise example.
Any business that buys or sells (or even makes) goods to produce income has a cost associated with the purchase (or production) of those goods; so need-less-to-say, as an eBayer, you have ‘cost of goods’ for any item that you sell on eBay. It is vital to record the cost of those goods purchased because you can deduct the cost from your gross receipts in computing your net income. This reduction in net income is as important as any other cost as it reduces the amount of income tax you will pay each year.
mr_dura-ace: This is a very good question and I believe I answer it fully in the upcoming posts. If, at the end of the today's workshop, you feel we have not answered this question fully, please ask it again.
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 document what you originally paid for the item, remember that the IRS can disallow any cost basis for which you have no purchase receipt.
Cliff Ennico, a lawyer specializing in legal and tax issues for small business and a popular instructor at eBay University, has provided great insight to the legal and tax issues of COGS in his book, ‘The ebay Seller’s Tax & Legal Answer Book’. You might want to get a copy today.
If you are selling an antique or collectable for which you have no receipt to document your cost basis, be sure to consult with your tax advisor. If you did not purchase the antique or collectable, how you obtained it would help in determining your basis. Remember to always keep records of how you determined your cost basis in case of an audit.
If you are selling ‘used’ items you have bought in the past, 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, do 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 tool 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 take a picture of the item as additional documentation of where you bought the item and the condition of the item when you bought it. 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 tool 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.
belins25: Our workshop today covers inventory and cost of goods sold. We are not here to give tax advice and highly recommend that you speak with your tax advisor about this issue.
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 a 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.
In essence, inventory is all the items you have unsold at any time during the year. The cost of this unsold merchandise is particularly important on the last day of the year, as it determines your ending inventory cost needed in the preparation of your tax return; and, at the same time, gives you your beginning inventory cost for the next year and will be used in preparation of next year’s tax return.
Cost of goods sold is the cost of the goods that you sell during the year and is a deductible expense to offset the income generated when you sell your inventory items.
I highly recommend that you visit with your tax advisor as to whether or not you need to maintain a complete inventory listing of all items you purchase and sell for your eBay business. Perhaps there is an easier way than tracking sales through a detailed inventory listing. Below we discuss the IRS rules and regulations for businesses with less than $1,000,000 in gross annual sales and how you report your income, cost of goods sold and inventory at the end of year.
Hi Phyllis-thank you for having the workshop. Is it too late into the year to sign up for Keepmore? Is it the best way to keep track of what is coming in and going out? I only had 2 months to account for last year and found it very hard. Also could you explain how sales use tax is figured out. Thanks
Everyone looks at COGS differently – but should follow the IRS guidelines on this subject
There are millions of eBayers selling thousands of different types of items on eBay. Some sell specific items (like cars) and records the cost and sell on a per item basis. Others buy and sell items in bulk. Tracking the cost for the single items like cars is simple. The bulk items may be more difficult.
An example may be someone who buys an entire house full of small items at an estate sale at one lump sum price to list and resale individually on eBay. Here the cost of goods to be sold gets more complicated. There are two methods you might want to consider as you sell those items bought in bulk throughout your tax year.
The simple method would be to consider the entire cost in one lump sum under purchases; while recording the revenue simply as ‘Gross receipts or sales’. Here you do not track the revenue vs. cost of goods sold by item. This method can also be used by the person selling ‘the cars’. You simply track total revenues against total COGS. The only time you have an issue with this method is at year end when you may have some items bought still not sold (ending inventory); but we will get into that later in the workshop.
If you want more concise profit calculations for the bulk items bought (and you have the time it will take to do the calculations) you have to come up with a method to value the items bought in bulk. The more experienced buyer may now that certain items have a resale value of a certain value; while other items are worthless and may have to be donated to a local charity in order to dispose of them. Using a percentage calculation would work in this situation. Deciding on a method and using it consistently is highly recommended. Again, I recommend you visit with your tax advisor and you document how you arrived at your cost basis calculation and store that calculation using KeepMore.net’s e-Document Storage.
Are expenses such as postage to ship items to customers considered cost of goods or other expense on sch c? I am confused about expenses to acquire goods such as web based services used. Are they COGS or Other? What about Ebay fees? COGS or other?
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.
Ending inventory is simply – the cost of the items you have available for sale next year.
Let’s look at a simple example of how you would calculate the Cost of Goods Sold for the sale of your Widget items on eBay. In this example it is easy to identify each items sold and the related cost of each. We had 10 Widgets at the beginning of the year for which we paid $100 each. We bought 120 more Widgets at a cost of $95 each and at the end of the year we had 20 of these $95 Widgets left to sell next year.
Now let’s look at the same scenario, but we cannot identify which of the Widget were sold, so we must use the Average Cost Method to calculate the cost of the items that were sold.
I have available an Inventory Worksheet in an excel format that I can send to you on request to assist you in tracking the cost of goods sold. Just send me your request for a copy of the Inventory Worksheet to me at phyllis@sagefire.com.
Hello and thanks for being here! I specialize in one, high volume item. Jibbitz shoe charms for Crocs. I'm looking for a way to keep track of inventory. I have several hundred designs and a lot of inventory for each design (equals thousands of pieces in inventory). So far, I'm doing a monthly hand count for beginning inventory of each design and then at the end of the month I manually subtract each sale using my invoice copies. It's pretty tedious and I'm thinking/hoping there is a more efficient way Any suggestions would be greatly appreciated.
What does the IRS say about accrual accounting method, tracking inventory and Cost of Goods Sold?
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 tool.
lettinggo444: It is never to too late to start keeping accurate records of your bought and sold items. The difference between what you sale an item for and what you pay for the item (plus other costs like listing fees and shipping) is the amount that you will pay income tax on. So you want your records to be as accurate as possible.
Getting a KeepMore.net account today with the automatic import of your eBay transactions can only help you save more of your 2008 tax dollars.
It is important to track the cost of goods that you sell so that you know the profit you make from the sale of those goods. If you are spending more money purchasing the product then you can ever make selling the product, you will always have a loss. By not tracking “all” the cost related to the goods that you sell, how will you every know when to increase your prices or even cease selling certain items.
As mentioned above, it is vital to record the cost of those goods purchased because you can deduct the cost from your gross receipts in computing your net income. This reduction in net income is as important as any other cost as it reduces the amount of income tax you will pay each year.
smudgymonkey: We do have an excel worksheet that may help you save time over the manual process. You can request a copy by sending me an email to phyllis@sagefire.com. You can test some items to see if it will work for you.
I've posted all of my material at this point, and would like to open the forum up to any questions you may have about what I've presented. There have been some great ones so far, so keep them coming!
I know that you're not a tax expert, but perhaps you have knowledge on how to claim the additional cost of selling on eBay. I deducted the following costs under the Other Expenses on my Schedule C, being that they're cost associated with selling on eBay, was this proper. Internet service Ebay Listing Fees, for sold items Ebay Listing Fees, for unsold items. eBay Final Value Fees, on sold items. Paypal Service Fees, on received payments.
The Office Supplies and shipping cost were reported under the office supplies, again I believe this was proper.
speedsport709: There are a lot of softwares available to track inventory and because each business may handle its inventory differently, I recommend you do some research through one of the browers and then make a decision as to which one would work best for your business situation.
Thanks Phyllis- I'm finding that some of my wholesale inventory I cannot double for retail because where I purchase them also sells online and at a lower price than what I would if I doubled the wholesale price. And that is not even including the cost to have it shipped to me. So should I not do business with companies that I have to sell a product at less than what I need to to make any profit? Thanks
you write: "...it is vital to record the cost of those goods purchased because you can deduct the cost from your gross receipts in computing your net income. This reduction in net income is as important as any other cost as it reduces the amount of income tax you will pay each year."
But you said in post #20 "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)."
I shouldn't buy inventory toward the end of the year since I am unlikely to sell it? What if those leftover widgets become old hat, and don't move? What if you have to sell them at a loss?
I am in a similar situation as smudgymonkey where i have a lot of small individual items which are often purchased used at garage sales and then sold individually how would you then account for cost of goods and also profit?
mr_dura-ace: As I stated in my opening paragraph, I am a Public Accountant with over 20 years experience doing income tax, accounting, bookkeeping and payroll for small businesses across the U.S. However, as we also stated, we are not here to provide tax advice.
I can only stress to you the importance of having a tax advisor available to help you with the issues you were asking about. You own and run your own business, but to know all the tax implications of an eBay business would be overwhelming to learn. Again, please visit with your tax advisor.
Another scenario occurs to me -- if you auction items that you just want to move and they end up selling for less than the actual costs, that goes where in your chart?
Not uneducated, just not clear on IRS and bookkeeping principles...
Hi there, I sell items and include the postage in the sale price. Example: 29.99, free shipping to any US Zip Code. This pricing seems to work great for me. Do I include my actual postage costs as part of COGS, or list it as an expense item ? Thanks for your help
lettinggo444: That's a personal business decision that I can't answer for you. You need to do your own cost analysis of the goods you sell to determine if you can stay in business (and consequently make a profit) from the goods you sell.
ladyecg: If you sell an item for a loss that reduces your net income and you will pay less tax. It is not profitable, of course, to sell items at a loss. However, it is less profitable to not sell them at all.
Subscribe to this topic via RSS Learn more about RSS
Information Central
Welcome to The Workshop Board!
This board is home to eBay Workshops hosted by the eBay Certified Provider Team. Visit the eBay Workshop Calendar for the list of current workshops and topics.
eBay Certified Providers have the tools, services, expertise and experience needed to help develop and grow your eBay business.
eBay Certified Providers are 3rd party companies with extensive expertise on the topic of their workshop. They are independent companies qualified by eBay to have demonstrated experience and expertise in growing eBay seller businesses.
New to eBay? Visit eBay Learning Essentials and learn how to get started on eBay from creating an account to listing your first item.
Already selling on eBay? Take your business on eBay to the next level with eBay Growth Strategies.
Workshops
Learn more about RSS
Must use Buy It Now and PayPal.
Previous
)
)
Any suggestions would be greatly appreciated.
)
