ABC Taxes, Tips & Tools

Retail­ers sell goods pur­chased from var­i­ous ven­dors.  Most goods pur­chased for resale, or used to make items for resale must be treated as inven­tory until such time as goods pur­chase or man­u­fac­tured are sold.  In gen­eral the pur­chase price of inven­tory and other cost relat­ing to the man­u­fac­tur­ing process can­not be taken as a deduc­tion against income until the mer­chan­dise is sold. Once the mer­chan­dise is sold then the costs incurred from pur­chas­ing, ship­ping, assem­bling etc. the item can be expensed as Cost of Goods Sold (COGS).

In addi­tion Uni­form Cap­i­tal­iza­tion (UNICAP) rules require cap­i­tal­iz­ing indi­rect costs allo­cat­able to the pro­duc­tion of real or tan­gi­ble per­sonal prop­erty to that prop­erty – so the cost of inven­tory will include not only the cost of mate­ri­als and labor to pro­duce it, but also will included costs such as depre­ci­a­tion of equip­ment used in the man­u­fac­tur­ing process as well.

Some ven­dors give an allowance that is to cover the esti­mated cost of defec­tive mer­chan­dise with no oblig­a­tion to return the defec­tive mer­chan­dise nor let the ven­dor know how much was defec­tive.  If this is the case, then these allowances do not have to be included in income as they are fixed and NOT related to actual amount of defec­tive mer­chan­dise NOR proof of defects NOR require the return of the defec­tive mer­chan­dise.  This allowance is treated as a trade dis­count, a sim­ple reduc­tion in the Cost of Goods from the vendor.

In addi­tion since this allowance is not related to the defec­tive mer­chan­dise specif­i­cally, the allowance reduces the cost of all of the goods from the ven­dor not just the defec­tive merchandise.

Finally when valu­ing the sub­nor­mal goods received, these items should be val­ued at the bone fide sell­ing price less the cost of direct dis­posal (if any).  They are nei­ther scrap nor spoilage, which nor­mally must be depre­ci­ated under UNICAP.

As always, small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you have any ques­tions about UNICAP rules, trade dis­counts or valu­ing inven­tory, or if you need other help Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in. The con­tent of this blog gen­er­ally applies to busi­ness and indi­vid­ual tax­a­tion in the United States of Amer­ica.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant, human resource spe­cial­ist, or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice. Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.