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madeforhome
10-17-2012, 02:31 PM
I am brand new at this small business thing and trying to figure out how to accurately and ethically report all expenses and income. I am a small arts and crafts business mostly taking vintage items and restoring or repurposing them for home decor use. I have kept all my expense receipts from this year and recorded the cost of materials for each item made. My question is, how do I report all the extra stuff like unused spray paint, fabric scraps, extra buttons, etc. for tax purposes. Do those things count against the cost of producing an item? Also, since this is a home based business I often will want to grab that extra spray paint or fabric scrap for my personal use. If I do that, how do I record that, or is it even necessary?

Freelancier
10-17-2012, 02:55 PM
Inventory is something you buy to sell directly without any significant change.

What it sounds like is you have expenses to produce what you're creating/restoring. You can go so far as to figure out the cost of goods sold, but that'll take apportioning the cost of these items against the total number of products you sold from what you bought. I'm not sure you need to do that as long as you're making a profit. It comes in handy when you're trying to lower the per-piece cost, but that's about it.

As for converting things to personal use... how is your business structured, as a corporation/LLC/LLP or as a sole prop?

madeforhome
10-17-2012, 05:51 PM
I am a sole proprietor.

nealrm
10-17-2012, 06:29 PM
I assume you are doing this on a cash basis. Then record the purchase as they are made and record them against that year. You really shouldn't be using business items for personnel use, however a $5 can a spray paint isn't going to amount to much.

Evan
10-17-2012, 08:39 PM
I am a small arts and crafts business mostly taking vintage items and restoring or repurposing them for home decor use. I have kept all my expense receipts from this year and recorded the cost of materials for each item made. My question is, how do I report all the extra stuff like unused spray paint, fabric scraps, extra buttons, etc. for tax purposes. Do those things count against the cost of producing an item? Also, since this is a home based business I often will want to grab that extra spray paint or fabric scrap for my personal use. If I do that, how do I record that, or is it even necessary?

Spray paint, fabric scraps, extra buttons, etc. are inventory supplies. So if you bought $50 worth of supplies, and a $5 item to restore, and used say two buttons (costing $1, from those supplies), you'd have an item for sale for $6 cost. If you sell it for $12, the $6 cost goes to "cost of goods sold" and is expensed. The remaining balance remains in inventory until it's depleted.

If you used inventory for personal use, you should subtract it from inventory to begin with. So that means in this case above, if you had $49 in supplies and used $5 worth, but bought another $50, you should report purchases of $45 ($50 costs, less the $5 for personal use).

Ideally though you're not going to be using the inventory of the business. But you also should, up front, be diligent about knowing the actual costs of your merchandise produced. Small businesses often do a bad job of tracking things like that. If you spend $50 for 1,000 buttons, you should really keep track of that inventory by buttons, and apply that cost to all of the items that require buttons. It seems trivial, but if you know what this is on average, you'll do a much better job of accounting for things and knowing what your true product cost is to sell. After awhile, assuming the supply cost remains consistent, you should then know what all of these items are truly costing you so you know you're not selling an item for $7 that actually costs you $6 in supplies, and you spent 2 hours to make -- seeing as you're not making money. (Unless your hourly rate is $0.50 / hour.)

madeforhome
10-17-2012, 09:39 PM
Is there such a thing as "waste" that would then be fair game for me to use personally? For example, I buy 1 yard of fabric and have a 6" scrap left over after I have made an item. Is that extra amount considered waste? The same with paint or glue. I have to buy the whole can of paint or the whole tube of glue whether I need the whole thing or not. Is the remainder considered waste or do I need to purchase it back for myself to use personally?

Evan
10-18-2012, 08:08 PM
It's not really "waste" per se. Your question goes down a slippery slope, because in theory you could buy a gallon of glue, only need a drop, and say the rest if "waste" and use it personally.

If you're talking about de-minimis amounts, fine... but if your also using these scraps to create new items and then sell them, then it should still remain in inventory.