How to Get Your Small Business Tax Ready | Reporting Cost of Goods
Last time we shared that reporting all income is the first step in getting your small business tax ready. The second step in ensuring that your costs of goods are reported accurately.
How to Calculate Cost of Goods Sold
Cost of goods sold is where you take into consideration your inventory. Your tax preparer uses three numbers to compute cost of goods:
- Beginning year inventory
- Plus current year purchases
- Less end of the year inventory
You should take inventory of product and goods on hand at least once a year. Do this close to year-end at around the same time each year.
If you purchase any items for personal use, as give-a-ways, or samples keep track of these so the dollar total can be subtracted from the cost of goods and put into supplies or other appropriate areas. Also remember, that if these items when purchased did not include sales tax, to include the value of all items on your sales tax return in the use tax section.
Other areas included in this section of your financial statements are:
- Subcontract and employee labor used in the production process of items you sell
- Packaging costs used for items (i.e. containers and labeling used for items you produced)
After calculating all costs related to the items sold, subtract total from sale which will give you a gross profit. Gross Profit / Sales should be compared with your mark up. Gross profit shows how much you made on the sale, and gives you the amount left to distribute between your pocket and business expenses.