Tax time can be a real headache for sales reps, especially if they only work part time. Many people who sell vitamins, cosmetics, cleaning supplies, scrapbooking supplies or other items door-to-door, through catalogs and house parties, don’t know how to report this small business activity on their tax return.
If you sell for Avon, Tupperware, Shaklee, Creative Memories, or other related corporations that use independent sales representatives to sell through house parties and catalogs, you must report all income, even if those sales are small.
The biggest problem here is that not everyone who signs up becomes an actual sales rep; Many of those who sign up only do so so they can purchase their own product at discounted prices. But before long, some of these reps find they can make a little extra money by throwing parties and handing out catalogs. And, once this happens, you are in business and must report all inventory to the IRS.
Inventory is handled differently than any other business expense; A sales representative can only deduct the cost of items that have been sold. All remaining inventory expenses must be carried over to the next fiscal year. If you do this wrong, your entire tax return could be audited.
Complying with this IRS requirement usually only takes a few minutes, once you know what to do. Follow these three easy steps and you’ll be done in no time.
Step one – On December 31, make a list of all unsold inventory. This is all that is left on their shelves. Inventory is disposed of in four ways: sell it, use it yourself, give it away as a sample, or throw it away. They are all deducted; your inventory count is just the product that remains on the shelves.
Second step – Find the monetary value of unsold inventory. If you only sell for a company, it’s simple, all you need are the invoices that were sent with each shipment. Put them in reverse date order, with the December bills on top.
Now, starting with the last invoice for December, locate each item remaining in inventory, highlighting unsold items on the original invoices. Once you locate all the items on these bills, set the rest of the bills aside; You are only concerned with invoices that contain featured products for your inventory count.
Use these invoices to find the value of all remaining inventory; this is the cost of the product plus a part of the shipping costs. Inventory shipping costs are divided among the items purchased; so if shipping was $10 for 10 items, $1 would be added to the cost of each item. Add it all together and you have the value of your unsold inventory. This figure is known as the inventory value at the end of the year.
Step three – Report the cost of goods sold to the IRS.
Inventory is reported on the back of the Schedule C small business tax form. There is space to report year-end inventory value, prior year or “opening” inventory value, merchandise added, product withdrawn for personal use and deductible inventory costs.
A new sales representative, or someone who sold all inventory before the end of the year, would have no inventory value from the previous year.
And that’s it, follow these three simple steps and you will always do it right.
