Inventory Tax Basics for New Small Business Owners

Inventory Tax Basics for New Small Business Owners

You’ve done your research and set up an online store that has all the right elements in place for success. You’ve decided how much inventory you’ll need to keep on hand, and now you might be wondering how this will be taxed. Here is brief overview.

At the end of the year, your business is going to be taxed on the profits it has earned. The basic equation involves your total revenue, which is the sales you make. Another component of this equation is the cost of goods sold, which is your inventory at the start as well as all the items you buy every year minus the ending inventory.

Anything that is not sold by time the year comes to a close, valued at your cost, is considered your inventory.

To determine profit, you simply subtract your cost of goods sold from your total revenue. It’s this profit that will form the basis of your taxes.

How Will You Be Taxed?

The way these taxes are reported will depend on the corporate structure type you’ve selected when you set up your business. The corporate structure really pertains more to how your assets will be protected. For example it can determine how your personal assets will be protected from any business liabilities you incur, and vice versa. This will also play a role in which forms you’ll have to file.

Which Forms Do You Need?

One popular corporate structure is a sole proprietorship. This means you have no business entity and should file a Schedule C alongside your personal tax return. In a single-member LLC, you’ll need to file Schedule C along with your personal tax return as well. A multi-member LLC is a little more complicated. You’ll file either a Small Corporation tax return or a partnership tax return depending on your case. A Partnership will file a 1065, while a corporation will need to file form 1120 as the business will be taxed separately from the owners.

This blog post was based off of an article from Entrepreneur. View the original here.