Back to Ganoksin | FAQ | Contact

Inventory for tax purposes


#1

Hi, My question is for the studio jeweler as opposed to the
storefront jeweler. I am using MYOB accounting software this year
and fantasizing about how easy taxes will be next year because of
it. But I am hung up on one thing – cost of materials; are they an
expense? I am wondering if the small-scale jewelers who sell
primarily through galleries and shows keep inventory for tax
purposes. I feel that metal and findings and stones should be listed
as cost of goods sold rather than expenses, but that would require
keeping a complex inventory, which I worry is too complex for me.
How do other artists track the expenses of materials that get used
in the pieces? Do you deduct exact weights from an inventory each
time you make a piece? And if so, what do you do about the materials
that you had before you began using the accounting system?

Thank you for your help,
Karin


#2

I’ve been using Jewelry Designer Manager for a couple of years now,
after evaluating all the small business software I could find. None
of it had any kind of useful inventory program.

I use it to track raw materials as well as finished pieces. I
haven’t upgraded to the latest version yet, but that version
automatically decrements raw materials from inventory after you add
the finished piece. You can also do bills of sale and maintain your
vendor list. It allows you to enter vendor-specific part numbers so
you can easily re-order.

I love it to pieces.

My accountant insists that I account for every tiny little bead and
headpin. I provide him with the ending inventory for the year and
the amount that I sold. Using those figures plus the ending
inventory from the year before he calculates the cost of goods sold.

You can find out more about it heRe:

Linda


#3

Karin

The cost of Materials EVENTUALLY turn out to be an expense when
used. When you buy stuff for manufacture it’s an investment
(inventory) and on the day it SELLS it turns into an expense.

But if the material is used up mostly as you get it you can write it
off as a cost of goods when you pay for it.

My suggestion is findings and such for repairs and custom work be an
"expense" (actually cost of goods) and stuff that sits in the case
remain inventory until it sells.

David Geller

PS I have two great books about this subject on my website:
www.jewelerprofit.com

JewelerProfit
510 Sutters Point
Atlanta, GA 30328
(404) 255-9565
www.JewelerProfit.com


#4

Karin,

I am a studio (not storefront) jeweler. I use Quicken Home &
Business to manage my books, along with some “homegrown” excel and db
applications.

With regard to inventory, I was told by my accountant to handle it
as follows, which is what I’ve done.

  1. Take inventory of all materials used in the finished products
    you produce. The actual amount you paid for the materials is their
    value for tax purposes (not the replacement value or the cost of the
    piece that results). Yes, this is a pain, and I generally do a FULL
    inventory once a year, with a spot inventory about half-way through
    the year.

  2. When you buy new materials, add it to the inventory list. (I
    just add it directly from my invoices.)

  3. Decide whether your way of “processing” inventory is going to be
    LIFO (last in, first out) or FIFO (first in, first out) and stick
    with that method. Basically, think of it this way. You buy 10 ft.
    of silver wire at $5.00/ft on 1/12. You buy another 10 ft of silver
    wire at 6.50/ft on 3/15.

You don’t want to have to keep track of which bag of wire you’ve
pulled from – it’s still exactly the same wire. From an inventory
perspective you just want to keep track that you used 3 ft. of wire.
By deciding whether you’re using LIFO or FIFO, you simply decide
which row of inventory to automatically deduct from first, on a
rolling basis of use.

  1. When you take inventory for your full inventory, after the first
    time you do it, you’re basically looking at stuff that’s on your list
    and seeing how much you have left of it. When you’ve bought new,
    you’ve added it to the list, remember – so you’re more following a
    checklist than counting everything and writing it down.

Do I count every little thing? NO. I figure it out roughly based
on what I know. I have a pack of jump rings and I get the weight of
one (or 10) of them, then weigh the pack to figure out about how many
there are. Wire I guesstimate based on the circumference of the coil
and how many wraps there are… or based on the weight of the coil of
wire if I tracked that when inputting the inventory (most suppliers
list the weight of what you bought).

So you have “20 ft. silver wire” on your inventory list and you
figure out that you have 17 ft left. You know you used 3 ft (your
cost of goods sold) and you’re carrying 17 ft in inventory. The
value of the 3 ft and the 17 ft will be determined by whether you used
LIFO or FIFO. With LIFO, you used $19.50 in wire and have $95.50
remaining in inventory. With FIFO, you used $15.00 in wire and have
$100. remaining in inventory. Either way, your total costs were
$115.

For Federal taxes (your state will vary), you have to declare an
opening and closing inventory each year. That inventory should be
made up of your raw materials as well as the cost of materials and
independent labor (not YOUR labor, unless you draw a salary from the
business) for any finished pieces.

The opening inventory each year must match the previous year’s
closing inventory, or you have to declare why it doesn’t.

In terms of materials you had before you started using the software,
I think the issue is more what you’ve previously declared on your tax
returns (Form C). If you’ve declared inventory, then that needs to
remain your starting inventory for the year. Otherwise, you should
simply input the inventory as your “starting point” in the software,
declaring its value as best you know and can document it.

It’s a bit of a pain to get started with, but once you’ve done it
for a bit it will be MUCH easier.

I hope this helps.

Karen Goeller
@Karen_Goeller


#5
You can find out more about it here:
http://www.jewelrydesignermanager.com/ 

I have exactly the same questions and software. I would love to
hear what the answers are.

Thank you,
Elen Freelander


#6

Karen – thank you and all the others for the great advice. Your
explanation is much clearer than that of my accountant (sweet guy
but he assumes I know his language, which I don’t!).

Point of note, I did have Jewelry Design Manager on my PC, but
recently switched to Mac (yahoo! big backflip happy faces here!). It
worked fine when doing beadwork but having switched almost entirely
to metalwork and lapidary and some contracting for piecework, I
needed something more professional, with tax codes, tax reporting,
invoicing, etc.

Thanks!
Roseann


#7

Thanks for a very lucid explanation. Do you know what the tax
implications of declaring a bunch of inventory after years of
avoidance is likely to be? I’ve also never inventoried my work - I
tried once, but it dwarfed my income to the point of oblivion.

Thanks,
Elen Freelander