Although tax planning should be a year-round process, a number of year-end considerations can reduce not only this year’s tax bill, but future tax bills as well. This is a great time to reflect on ways to improve our accounting tools and organization for next year. In addition to last minute write-offs, consider how other factors will affect your tax bill.
Take an End of Year Inventory
Every retail business has inventory. Inventory is important in determining your profit – and profit determines your tax bill. Although it is an expense to the business, inventory is not a deduction until it is sold. Until then, inventory doesn’t affect profits and is considered an asset.
The cost of the inventory that you have left at the end of the year becomes an important part of your Cost of Goods Sold deduction.
The Cost Of Goods Sold is generally calculated as follows:
Beginning Inventory Cost
+Additional Inventory Purchased (minus any items taken for personal use)
=Available Inventory Cost
Available Inventory Cost
-Ending Inventory Cost
= Cost Of Goods Sold
Be sure to take an end of year inventory as close to actual year end as possible. Do this by totaling the cost of all items left in stock. This number is equally important for the following year since it is also next years Beginning Inventory.
Tech Tip: In order to help account for this properly don’t forget to export your product inventory, with Store’s Cost per item and Quantities, to a spreadsheet on December 31st. In order for this to be effective you must accurately keep track of the Store’s Cost of individual items in your ecommerce software.
Last Minute Write Offs
Depending on your tax strategy, December can be a good time of year to consider any last minute purchases needed for your business. If it makes sense for you to increase your deductions this year instead of the next consider making purchases for needed office supplies and equipment now to increase this years savings.
Tax Planning All the Time
Although tax planning should be a year-round process, a number of year-end considerations can reduce not only this year’s tax bill, but future tax bills as well.
Keep in mind, however, the financial or operational strengths of any business decision should always stand on their own, aside from any tax benefits derived from them.
Finally, whether or not your business is facing a large tax bill or severely lower taxable income, professional advice is almost a necessity.
Merchants should be taking additional steps to ensure their online retail success in 2010. Proper tax planning will help minimize the bite of taxes this year as well as in future tax years.
Things to Keep Track of
• Total $ amount of sales to customers
• Total $ amount (retail & cost) of inventory orders
• Total $ amount of expenses (office expense, advertising, copy paper, computer stuff, etc.)
• Total # of miles used for business (if applicable, you should have a written log of this)
• End of year inventory cost of products you have on hand
• Total $ amount of products you have used personally
• Total $ amount of products that you have given as gifts or had a loss on
• Total $ amount of meals or transportation expenses related to your business
Final Thoughts
Keeping these things in mind throughout the year can make it easier come tax time. Each year is a new opportunity to become more organized and to find accounting tools and strategies that work best for you.
Disclaimer: Network Solutions does not advise on any personal or business tax requirements or issues. Use of any information from this post is for general information only and does not represent personal or business tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance. Any information provided in this post is not intended or written to be used, and it cannot be used, by you or your business for the purpose of avoiding any penalty that may be imposed by the Internal Revenue Service.
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