Cash Hash » Cash Hash » Cash and Carry » I'm the owner of a small food business. How do I figure out my "cost of goods sold" for tax purposes?

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  #1 (permalink)
: I am the owner of this business as of Nov. 2013. In terms of expenses under the tax category, is my own labor part of this expense? I am the only employee of the company and I am not actually paying myself a wage yet. So can I come up with a wage (eg. $10/hour) and list this as "labor" in the "cost of goods sold?" Also: I assume that my "materials" would be all of the ingredients that I use to make my product. Is it ok to list them here? Finally, I assume that I can include all of the supplies that I purchased to get my business off the ground (approx. $4500) as "business expenses." Is this correct? Having never owned a small business, this is all new to me!

Thanks!

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  #2 (permalink)
: To answer your question, if you have not paid yourself anything out of the business, you obviously cannot write off $10 per hour - if the business did not spend the money you can't take it off as an expense.

First thing, you should decide if you are going to account for products using a cash or accrual basis. The question is, do you carry inventory for longer than a few weeks or a month? If not, then cash accounting is fine. You take the expense of your raw materials when you pay for them. If you hold them a long time, several months, then accrual is the way to go. With accrual, your cost of goods is just ending inventory minus beginning inventory plus purchases made during the year. For taxes don't list your ingredients, just lump them all together as "ingredients" or whatever description you want to use.

All of your expenses to set up the business can (generally) be taken as expenses on your tax return. Also don't forget any mileage you put on your vehicle picking up and delivering.

If you are serious about being in business, you should get an accountant.
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  #3 (permalink)
: No, your own labor is not included as an expense.
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  #4 (permalink)
: No. An expense is money you paid to someone else. Your own labor is not an expense because you don't pay for it.

"Cost of goods sold" is money that you spend to buy something that you later sell.
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  #5 (permalink)
: as the sole proprietor you will NEVER pay yourself, the bottom line, the 'net' is your income
if you are manufacturing something the costs of material etc and labor would be amassed as the cost of goods
however if you are buying a product which you turn around and sell your cost of goods is the cost to buy the goods, the freight to get it to your location etc
other expenses need to be relative to the business to be claimed as such
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  #6 (permalink)
: Cost of Goods (or Services) is a Direct Cost. This means it is Directly involved in the earning of the Income.

A Salesman's Commission is a Direct Cost. A factory line worker's payroll is a Direct Cost. This is because you can tie the cost Directly to the Good or Service sold.

In your case, the Food cost is your Direct Cost. If you are making a pre-packaged product for wholesale customers, then your employee payroll directly tied to the production is the same as a factory worker.

All other payroll (bookkeeper, janitor, etc) are Indirect Costs.

Other Indirect costs are Rent, Telephone, utilities (unless separately metered for the factory floor), etc.

One mentioned the accrual method. This is only good for "inventory" that is held for an extended period of time. This method you book the food into "inventory" when you receive it and then make adjusting entries to "expense" it as it's used. Since you probably won't have the food ingredients around for more than a month, tops, accruing is more work than it's worth.

Since Food is very perishable, don't bother with accruing the food purchases. Estimate what you normally have on hand at any given time and use this as your Beginning and Ending Inventory. Then, Expense the purchases directly when received.

As a bookkeeper, I have found this usually works out rather closely. The variance at year's end is usually insignificant.
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As for your "labor", this depends.

What kind of entity formation is this: Corporation, LLC, Sole Proprietorship?

If this is a Sole proprietorship (Schedule C) or an LLC defaulting to a Sole Proprietorship, you are never "on payroll". You are the business and therefore prohibited from being on payroll. Your "wages" are the businesses net profits.

If this is a Corporation and you are the "chief cook and bottle washer", then part of your payroll might be classified as Direct Costs if this is a manufacturing endeavor (pre-packaged food, remember).
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"I assume that I can include all of the supplies that I purchased to get my business off the ground (approx. $4500) as "business expenses."

This also depends. Often expenses to "Start Up" a company are considered "startup costs" and are "Capitalized". This means you can only take a portion as an expense each year - for 15 years. Equipment (like an oven or stove) Always are Capital Expenses and are Depreciated. Again, this means you get to take a portion over the "life" of the item. Startup costs can include: formation of Corporation or LLC costs, signage, "build out" costs (mostly cosmetic construction on an existing property), legal fees for trademarks, name research, etc.

For example, computers have a "life" of 5 years. So a $1000 computer is depreciated (using Straight Line) $200 per year for 5 years.
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I hope this helps.

But to be honest, you have a lot to learn and probably should find a good bookkeeper or accountant to consult. Or check your bookstore or library for books on running a small business and the accounting that goes with it.

It's better to pay someone to help with things you are not proficient in so you can concentrate on what you do best. but you always need to be aware of what's going on.
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  #7 (permalink)
: IRS doesn't care anything about COG sold. They only care about income and expenses.
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  #8 (permalink)
: @Linda

"IRS doesn't care anything about COG sold. They only care about income and expenses"

Not altogether true.

If your CoGS is too high, they will suspect you are not reporting all of your cash sales while reporting all of your purchases.

We had a client like this; a pizza shop.

He was so dumb, he spoke of it to us and even gave us the Greek Bank Account statements where he was stashing the cash.

Needless to say, he is no longer in business.
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