Quote:
Originally Posted by jcc6252
Here is a hypothetical scenario:
A) Beginning Inventory $30,000
B) Inventory Purchases $35,000
C) Ending Inventory $40,000
D) Inv. Sold (A+B-C) $25,000
E) Gross Sales $33,000
F) Expenses $ 3,000
Would I be responsible for $5,000 (E-D-F) in taxable income?
Or, would it be considered a loss for the year, since I finished the year with $10,000 more (C-A) in my inventory?
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As a tax professional (Enrolled Agent), I can weigh in on this.
If you're conducting a business, whether on the side or as a full-time effort, the fact that you ended the year with more inventory than you began with is beside the point. What matters is how much you paid for the specific items you sold.
Deciding whether it's a business or a hobby depends on the overall facts of the individual case. If it's truly a business you can take the occasional loss, but if it's a hobby you can not take a loss in any year. And the rules about what you can count as expenses are tighter for a hobby. For example, you could always count shipping costs, but costs for travel to a show in Phoenix in February would be a tough sell to me if it's a hobby.
Also, when the line between "my collection" and "my inventory" starts to blur, then you're in peril of your business being determined to be a hobby.
To circle back to the OP's original question, as others have said there is a taxable gain of $5,000 in this scenario. If you're running it as a business then you'd do a Schedule C (you can't do the C-EZ, because you have cost of goods sold), and you'd owe self-employment tax (that's both halves of FICA) on the net income, figured on Schedule SE. If it's a hobby, then any income shows up on line 21 as Other Income, with no SE tax owed.
Bill