Discussion:Inventory Problem
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Discussion Forum Index --> Tax Questions --> Inventory Problem
| 16 January 2007 | |
| Hi, I have another issue.
I have been in business for 4 years now and the first 2 was never ask by my accountant to do a years end inventory count. We now have a new accountant as of late 2005 and they ask me for an inventory count at years end in 2005. At that time I had someone else do it and they apparently werent even close to being accurate because the off-set from this years inventory count, which I did myself, doesnt even come close. The problem is my accountant is strictly going by these numbers and by doing so I show to much profits, hence having to pay higher taxes. But if we just go by the cost of goods purchased vs sales (instead of the inventory), I show less profit, which in turn will be less taxes and higher profits.. I know the ladder (cost of good purchased vs sales) is 100% accurate and by deviating from that, will cost me dearly.. Any sugestions? By the way I am an LLC in Michigan. Thanks Cuz | |
| 16 January 2007 | |
| Entities with inventory on hand at their tax year end are required to separate them from COGS. Yes, this will result in a larger net income figure but required by the code and regs. If the Inventory amount that was supplied to your accountant was incorrect, I would tell him/her and supply corrected documentation. | |
| 16 January 2007 | |
| What sort of business? And what does the inventory consist of? Retail store? | |
| January 16, 2007 | |
| Sounds like your cost of sales over the years has been less than you've booked, and the inventory has crept up. Happens all the time, and now it's time to come clean and report what you should have. Look at it this way, you've gotten some unreported profits along the way. . .small comfort I know. | |
| 16 January 2007 | |
| Where a wholesale distribution company that consists of products with our own registered trademark brand name on them. We sell to both end-users and stores (Hunting Equipment).
This whole thing is just blowing me away because our margins are huge (compared to other companies who sell the same products with their own name on it), yet my year end profits are less than when I punched a clock. And it seems to be like this every year. This year we thought we were going to have decent profits until the accountant said because of the off-set in the inventory that we will have to pay out more, which leaves me with less than tabel scraps. Just deosnt seem right because we havent profited good yet, even though are margins are incredible. Thanks again Cuz | |
| January 16, 2007 | |
| You could always have your new accountant amend your prior years (to show the correct ending inventories) and pay back the tax (plus interest) that you didn't pay in those years--plus your accountant's fees for preparing the amended returns. | |
| January 16, 2007 | |
| LOL. That's helpful, eh, Deb? OK, Cuz, what kind of hunting equipment there? Maybe I could buy a little to help you out! I mostly deer hunt...and whack prairie dogs until ammo runs out each year in Wyoming. | |
| 16 January 2007 | |
| I think the misunderstanding here between Cuz and his tax bill basically boils down to differences in Cuz's method of matching income and expenses, and the correct way of doing so.
Look at it this way. Previously you have benefited from this difference. Now its time to pay up. Next year all things should be equal and you can get a true picture of your profitability. Your previous profits were more than likely overstated, by the same amount this years will be understated. | |
| 16 January 2007 | |
| Jr1,
Actually, when you go Prairie dog hunting or deer hunting, you just may be using one of my products, but I'm not about to give-away my product brand name. Gosix, I have yet to make decent profits so I doubt previous years were inflated. I think I need a new accountant that knows more or could at least give us some advise on WHY our profits are so low and what we can do to help make them better. $800,000 in gross sales, over $650,000 in expenses, $50,000 for the first 3 quarter taxes and now he claims we owe over $80,000 for the 4th quarter. Do the math, that leaves me $20,000 Cuz | |
| 16 January 2007 | |
| Can't be right. $150,000 net income and $130,000 in taxes. Without knowing the details of how your LLC is taxed, and what type of taxes your including in the quarters, its hard to come up with an accurate number of where you should be. A disregarded entity LLC with $150,000 profit would have roughly $15,698 of self employment tax, and if single, federal income tax of $33,966 for a federal total of $49,664. A far cry from the $130,000 you have above. Have you looked into having your returns reviewed by someone else for accuracy. Many firms offer free reviews to get the opportunity to get new clients. Sometimes the preparers out there have no clue. I had one client that we did a review for that said the same thing. They were showing profits on their 1040, but never had any cash left. Turns out the prior accountant was calculating self employment tax on gross sales instead of net income. | |
Death&Taxes (talk|edits) said: | 16 January 2007 |
| And you also have the business that spent a lot of money on your building this year with little advice. | |
| January 16, 2007 | |
| Drp - Earlier in this discussion, it was mentioned that the ending inventory was not reported in the prior years, so this taxpayer didn't pay enough tax in those years. So, it sounds like the new accountant is treating part of the 2006 expenses as ending inventory, which increases the net income. | |
| 16 January 2007 | |
| Most of these questions sound like ones that you should be asking your accountant. Let him/her know your concerns....Something's not right with your last numbers that you post here. (Taxes of $130,000 on $150,000 profit????) I can't imagine your inventory being off that far. | |
| 16 January 2007 | |
| Oops, sorry about that last post....got a phone call in the middle of response.....too late.. | |
| 16 January 2007 | |
| I tried to tell my curent accountant the same thing, it just doesnt seem right.
Once I get the current Accountants final results I will be contacting another CPA I know (who is also a secretary for a large company I used to work for) and see what she thinks. Every year we run into these problems and end up having to spend hours and hours going through filed paperwork to help explain things and its getting old doing this. The paperwork we submit is very detailed and my wife even goes beyond that by adding hand writing notes detailing it even further.. Thanks for all the help and advice Cuz | |
| 16 January 2007 | |
| <$800,000 in gross sales, over $650,000 in expenses, $50,000 for the first 3 quarter taxes and now he claims we owe over $80,000 for the 4th quarter. Do the math, that leaves me $20,000 >
Does "expenses" include your inventory on hand and/or the entire cost of the building you added this year? I'm just thinking there has to be some major difference in comprehension. Whether it be you or your accountant. Are your records in a Quickbooks file? Or hand calculated? | |
Death&Taxes (talk|edits) said: | 16 January 2007 |
| Are any of these expenses part of those discussed in Discussion: Business Expenses earlier which had to do with a new building? From what I read you are in the middle of nowhere, with few professionals around, but if your business will thrive, perhaps paying the travel costs of someone from 'the big city' would be worth it. If you are a calendar year, you may have waited too late to find someone with the time to start anew for 2006. | |
| 16 January 2007 | |
| I only use QB to enter, record and print the transactions (no expenses are entered). My wife has a monthly leger where she records all the expenses and even breaks them down. She them gives them to the acountant monthly.
D&T, Out of that figure I claimed in new building costs, only about $100,000 is actual building expenses. I found out today, the reamining can be mostly written off (I included office equipment and such in that figure).. As stated before I have already gone through 4 accountants in 4 years and they all claim the previous one made mistakes (I had 2 differnt ones the first year they didnt have a clue). None of them had experience in this type of business and it has caused me much grief. The one I will be contacting is expensive but I think it will be well worth it. I just got off the phone with the accountant and he told me I shouldnt of counted my defective returns in my inventory count. I told him the manufacturer replaces them so if I dont count them now, they will eventually show back up as good inventory. Cuz | |
Mark Eason (talk|edits) said: | 17 January 2007 |
| Cuz, I did not see where anybody mentioned Accounts Payable. I have had clients with wild swings in margin and in inventory. These problems were caused because nobody was reconciling inventory to A/P. Example, inventory arrives on 12/15 and is counted on 12/31 inventory. Invoice/statement arrives 1/15 and A/P and purchase entry is made at that time. Inventory is increased at 12/31 without any increase in purchases for those items (that happens in the next year messing up the margin). Solution: Set up a dummy account in payables and book inventory when it arrives to purchases and the dummy accrual account. Keep packaging slips in a "to be reconciled" file. When invoice comes in, match to packaging slip. Remove amount from dummy accrual account and enter into A/P. Make any adjustments at this time for changes in price and freight. (assumpiton: You only adjust Inventory once a year.)
While fixing your other problems, make sure your inventory is reconciled to your A/P. This could be the reason for you margins being high. | |
