End of Year Tax Planning: Overlooked Deductions (Part 2)

[Transcription]

Welcome to part two of Overlooked Deductions. Today, I’m talking specifically about worthless inventory. Now, what is worthless inventory? So, let’s say you have a business of buy and selling products. You buy something to sell it. When you buy this product for resale, that part is called inventory. Now, sometimes you might think product A might sell, and so you buy tons of product A. And you put it up, nobody is buying it. You cut the price, nobody is buying it. You have a Black Friday sale, and nobody is still buying. You pretty much give the thing away for free, and nobody’s buying. At that point, your inventory is probably worthless, nobody wants it. So, what do you do with this inventory? What can you do? Are you still going to pay taxes? Are you still going to pay taxes on the amount that you never even claimed as expenses? What can you do? What can you do to help you?

At least since you didn’t make the sale, what can you do to help you reduce the outflow? The first thing you can do is say, “Thank you 2018 Job Tax Act.” Because guess what? In 2018, you no longer have to accrue your inventory. You don’t ever have to capitalize it and put it on the balance sheet statement. You can now recognize the expense as you pay it, just like any other material and supply. Now take a look at here, cash basis, accrual basis. You can see, even though revenue is the same, expenses which is based on the cost of those… So okay, here we can see the beginning inventory is $10,000 and $60,000. Here, we just have the round $55,000 in the accrual basis, and then cash basis will have $55,000, because that’s how much cash actually went out. Then net income in the cash basis is $45,000, in the accrual basis is $95,000. So, in this case, the cash basis actually works out when there’s inventory, because guess what?

I no longer have to wait ’til I sell my inventory to recognize it as an expense. That’s a huge saving. So, that’s the first thing you might want to look to do, to see, “Okay, can I save by doing the cash basis of inventory, versus the accrual basis?” So, let’s say you don’t want to switch over to the cash basis, you just like, “I like doing things exactly the same way I’ve always done it. I don’t like change, even if it benefits me.” Believe it or not, there are people like that. So, if you’re that way, no problem, that’s good for you. There’s something else you can do, you can give the excess inventory to charity. Because there are people that would need that product but might not be able to pay for it. So, if you choose to do that, let’s see what happens. It was $50,000 worth of worthless inventory. So, you give $50,000 away, you have $10,000 left. Cost of goods sold becomes… The amount during the year becomes $55,000.

So, you can see on the book, cash basis and accrual basis we’re now at $45,000 net income. We’re still at the same place, without having to change our methods. Another thing you can do is sell to a business that specializes in buying assets that you want to liquidate, inventory you want to liquidate. So basically, they buy for pennies on the dollar. So, if something is worth a dollar, they might pay a penny for it. So, you can look for those companies, and you can sell to them. So, what happens is when you sell to this company is, they can… They might have more marketing power than you, and might be able to sell it, when you couldn’t sell it. So, you would get some revenue from it, but it wouldn’t be that much. So, in this case, let’s say the $50,000 worth of inventory, you sold it for $5,000. So, your revenue is going to increase by $5,000 in that case. And then your ending balance of your inventory is still $10,000, your cost of goods sold is still $55,000.

So, here we can see both in cash and accrual basis, we still have $50,000 dollars’ worth of net income. Income rose by the income received $5,000. But hey, but I’d rather pay taxes on $5,000, than totally lose $5,000. So, to me I think it’s a good option. If you can get a liquidated business that can take your inventory from you when it’s not selling, hey, the more power to you. Hey, are you still here? What are you still doing here? Go look at your financials, go look at your inventory. Go take stock. What is not moving? Do you need to sell anything? Do you need to give anything to charity? You need to take action now, before year end comes.

Here it is November, December will be here and gone before you know it. It’ll be too late to do anything by then. So, go ahead, go take a look at your inventory now, and take any action that needs to be taken now. To help you see the effects of any transactions you might take, go ahead and download the Excel file by clicking the link below. Like what you see? Go ahead and click the subscribe button on the very bottom of this video. I look forward to seeing you in future videos.

 

Download Excel file by clicking here.

By |2018-12-06T17:15:19+00:00December 12th, 2018|2018 Tax Planning|Comments Off on End of Year Tax Planning: Overlooked Deductions (Part 2)

About the Author:

With over 16 years of accounting and finance experience, I know what it takes to make your business profitable. However, in my opinion of what really makes me qualified to work with you is my love for using my God-given gift to help people with numbers. I love difficult problems and my business is to be in the business of helping other people achieve their dream/vision/ goal in the most cost effective and productive way. I am very passionate about my clients and take their problems very personally.