01/11/2022
⬇️✨🏦Max Revenue TIP 🏦✨⬇️
⬇️READING IS FUNDAMENTAL ⬇️
Deductions for Cost of Goods Sold
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👉🏾If your business manufactures products or purchases them for resale, you must generally value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your business expenses may be included in figuring cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
👉🏾The following are types of expenses that go into figuring cost of goods sold.
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💰The cost of products or raw materials, including freight.
💰Storage.
💰Direct labor (including contributions to pension or annuity plans) for workers who produce the products.
💰Factory overhead.
👉🏾Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
🤌🏾This rule does not apply to small business taxpayers. You qualify as a small business taxpayer if you (a) have average annual gross receipts of $26 million or less for the 3 prior tax years, and (b) are not a tax shelter (as defined in section 448(d)(3)). If your business has not been in existence for all of the 3-tax-year period used in figuring average gross receipts, base your average on the period it has existed, and if your business has a predecessor entity, include the gross receipts of the predecessor entity from the 3-tax-year period when figuring average gross receipts. If your business (or predecessor entity) had short tax years for any of the 3-tax-year period, annualize your business’ gross receipts for the short tax years that are part of the 3-tax-year period. See Pub. 538 for more information.
