Total expenses

[songbirdz03]

What would fall under your expenses? ex: insurance, cleaning, telephone, etc.

[sterling]

Are you doing your taxes or are just trying to figure out your profit?

Two very different answers.

[alyssamma]

Sterling, why do you say they are "very different"? What expenses would you include for profit that you wouldn't include for taxes or vice-versa?

Kevin

[sterling]

I don't factor in my gas, paper towel, wear and tear on my vehicle, depreciation on machines in my calculation on if I am in the red or in the black.  However for taxes purposes by all means calculate all legal tax deductions afforded a business owner.

In other words my taxable income is much smaller than spendable due to legal deductions. Mileage, depreciation, interest ect.

[alyssamma]

All of that should be in you non-tax calculations too. I guess if you have a reason for not doing it, that would be fine. But for someone trying to get a handle on actual profit, the same expenses should be counted for tax and non-tax purposes.

Kevin

[Jax Snacks]

Kevin,

I am not an accountant but...  I do see times where the "actual (out-of-pocket) costs" may not equal the legal tax write off amount.  I keep track of ALL my actual (out-of-pocket) expenses in Quicken so I can see where the actual (real) money is going.  However, I do not track Depreciation, Milage and COGS in Quicken but they are "processed" only at tax time.  How do you expense your product costs for tax purposes?  My accountant set me up to where I have to estimate the inventory in each machine in order to compute the COGS = Begin Inventory + Product Cost  - End Inventory.  COGS is all that you are allowed to expense and any inventory waiting to be sold (either in unopen bags or in the machines) can not be expensed - according to my accountant.  So the money out of my pocket (Product Cost) will usually exceed the allowable deduction (which sucks).  However, the mileage expense usually exceeds the cost of gas, repairs, insurance, etc. and I usually legally write off more the actual (out-of-pcoket) costs (which does NOT suck).  The same could happen with equipment depreciation.  I don't track depreciation in Quicken, just the actual costs -  however that is a moot point for me since I legally deduct all equipment via Section 179.  But others may not and in that case the actual (out-of-pocket) costs would be greater than the allowable tax deduction.

I think that is what sterling is trying to say, but I don't want to put words in his mouth either.  But I do see his point.  A sophiscated accountant my track everything in a data base, but that is overkill for me and I just square up with the IRS every April.

Jax

[alyssamma]

Jax, you made an excellent post. And kudos for the correct usage of COGS

First, to answer your Q...

I expense my product and ignore COGS. I keep a very low inventory (even when I did full line). What your accountant is doing is 100% correct. What I am doing is...gray But my inventory amount at the end of the year is so low that I am pretty sure the IRS wouldn't care. Now watch me get audited Seriously though, when I had full line it was a few hundred $, now with just bulk less than $100. It isn't worth the time to calculate a true COGS.

Now, for the OP...I guess it depends on how you want to account for things. Mileage deduction is a perfect example of where actual out of pocket costs don't equal the expenses you report to the IRS. However, if you actually added up your *true* costs - gas, maintenance, repairs, wear and tear on your car, etc., I suspect mileage deduction would be pretty close to that.

Depreciation is a maybe...but since people here should be using Sec 179, that becomes an expense...and is directly related to what is in your pocket. Put another way, no reason anyone here should be using depreciation (disclaimer - there are probably 1 or 2 members with weird tax circumstances where depreciation makes sense, but for everyone else...)

COGS, as you point out means what you actually pay is less than you can deduct, but I would submit that for all but the largest bulk vendors, it is a moot point. The allowable deduction will be very close to the actual costs.

So, there are 3 items where we might be off - COGS, depreciation, and mileage deduction. However, most here I'm sure do like me and ignore COGS. Those who don't, and aren't very large, will find their deductible expense and actual expense to be very close. We already covered depreciation and sec 179 which just leaves mileage. Again, I submit that the actual cost of operating your car comes pretty close to the mileage deduction amount.

So, all of that is a long winded way of saying that I believe the "tax" expenses and "actual" expenses to be pretty close. So, why track both? Just track the tax expenses since you'll need those anyway for the IRS.

Again, there are some vendors out there where COGS will make a difference. You are obviously an example. But I can't picture it being that much. If you ignored COGS and expensed everything would your profit change by more than 5%?

It is late...hopefully this makes sense

Kevin

[Jax Snacks]

Thanks for the info Kevin.  Sometimes I think my accountant was a perfectionist in handling the COGS and created an unnecessary paperwork problem (or should I say accounting nightmare!).  I may talk to my new accountant about simply expensing the PC.  Yes, It can be a moot point since the Begin Inventory will almost equal End Inventory when the business matures.  My accountant provides a worksheet for all those numbers (actual or not) to be processed.  I like tracking all the automotive expenses just in case they exceed your milage deduction since you can take the greater of the two.

Jax

[caserri]

But my inventory amount at the end of the year is so low that I am pretty sure the IRS wouldn't care. Now watch me get audited

Careful there Kevin, remember the IRS is watching VENDiscuss for people just like you. 

[alyssamma]

LOL, good point Steve

Jax, one other thing I thought about. When I started vending I actually talked to my accountant about COGS. I wanted to make sure I wasn't violating something in a big way. He actually said I could consider inventory "used" once it was placed in the machine. Now this was for bulk - and I think it makes sense there. I'm not 100% sure for full line, but I think you can make the same argument there too. This would eliminate the estimation process.

However, like you said, after a couple of years begins inv - end inv (unless you are expanding or shrinking ).

[mission vending]

I like tracking all the automotive expenses just in case they exceed your milage deduction since you can take the greater of the two.

I'm not sure here....... if I remember correctly my accountant has told me something to the effect of pick a method and stick with it because you can't switch back and forth every year. For me, I keep records for both methods but I've stuck with the mileage for tax purposes because it's easier and most years I do a little better (bigger deduction) with it.

[s.weir]

Mission is correct.  Accounting principals generally dictate that once you have an accepted method stick with it.  Otherwise everyone would just choose whatever beneficial to them that month lol.

[lurtsman]

I thought milage vs car costs was the one area where you were allowed to switch back and forth. However I have the least experience in this area and could easily be wrong. Infact, I'm starting on turbo tax today, I figure as I grow it will be far more effecient than doing it myself on paper, and until I'm huge it won't be worth hiring an accountant. I'd prefer to do it on paper, but I estimate that mistakes would be too easy--and hopefully Turbotax makes more sense than the forms I've been doing before. My wife used to do all of our taxes, but now that I have the business I knew it was time to learn.

PS. I will unquestionably take a large loss on 2009. I have very little income so my tax bracket is small. Does the loss reduce my taxable income from the job, or can the loss simply be carried over into 2010 to offset profits? I recognize it is more likely than not that 2010 will also post a loss as I expand aggressively and deduct the cost of machines.

[lurtsman]

Lurts it may pay to find a good accountant.

At some point it will. Currently they would charge me every dime I had in my net sales column. In a few years I will be large enough, until then I'm relying on Turbotax, since I'm a bit of a computer geek and feel comfortable working with software.

Follow up point. For anyone considering turbotax. Go through USAA if you have them, there is a 25% discount.

[alyssamma]

Actually, you *can* switch back and forth - in general. And I think you can even switch mid year in some circumstances. However, there are all sorts of rules - like did you depreciate the car, is it leased, etc. You would need an accountant - or be willing to read a bunch of IRS regs to figure it our yourself.

I just use the standard deduction. Very easy and record keeping is a snap.

Kevin

[lurtsman]

For next year. I have a truck that is almost strictly business -- if I take it anywhere else I will record the milage. Do I also need to record each trip for vending--or can I just use the odometer change minus the personal miles?