Tax time can be a real headache for sales representatives, especially if they only work part-time. Many people who sell vitamins, cosmetics, cleaning products, scrapbook supplies, or other items door-to-door, through catalogs and home parties, are confused about how to report this small business activity on their tax return.
If you sell for Avon, Tupperware, Shaklee, Creative Memories or other like-minded corporations that use independent sales reps to sell through home parties and catalogs you are required to report all income, even if those sales are few.
The biggest problem here is that not everyone who signs up becomes an actual sales rep; many who sign on only do it so that they can purchase their own product at discounted rates. But before long some of these reps discover that they can make a little extra money by throwing parties and passing out catalogs. And, once this happens you are in business and required to report all inventory to the IRS.
Inventory is handled differently than any other business expense; a sales rep can only deduct the cost of items that have been sold. All remaining inventory expenses must be carried over into the following tax year. Do this wrong and your entire tax return could be audited.
Satisfying this IRS requirement generally only takes a few minutes, once you know what to do. Follow these three simple steps and you’ll be done in no time at all.
Step One – On December 31st make a list of all unsold inventory. This is everything left on your shelves. Inventory is removed in four ways: you sell it, you use it yourself, you give it away as samples, or you toss it in the trash. All are deducted; your inventory count is only the product that remains on the shelves.
Step Two – Find the monetary value of unsold inventory. If you only sell for one company it’s simple, all you need are the invoices that were sent with each shipment. Put them in reverse date order, with the invoices for December on top.
Now, beginning with that last December invoice, locate each item remaining in inventory, highlighting unsold items on the original invoices. Once you locate all items on these invoices, put the rest of the invoices aside; you’re only concerned with those invoices containing highlighted product for your inventory count.
Use these invoices to find the value for all remaining inventory; this is the cost of the product plus a portion of any shipping charges. Inventory shipping charges are split between the items purchased; so if shipping was $10 for 10 items each item would get $1 added to the cost. Add everything together and you have the value of your unsold inventory. This figure is referred to as the end of year inventory value.
Step Three – Report the Cost of Goods Sold to the IRS.
Inventory is reported on the back of the Schedule C small business tax form. There is space for declaring your end of year inventory value, prior year or “opening” inventory value, merchandise added, product removed for personal use, and deductible inventory costs.
A new sales rep, or someone who sold all inventory prior to the end of the year, would have no prior year inventory value.
And that’s all there is to it, follow these three simple steps and you’ll get it right every time.