My wife runs a small gift shop as a sole-proprietor, she has purchased inventory using a business credit card and I'm unsure how it should be handled in calculating profit for tax purposes. She uses cash accounting because she does everything herself. So here is a hypothetical simplification of the scenario.
If she started the year with $10k in inventory and at the end of the year she has made $100k in sales, spent $50K cash and $10k credit on inventory, spent $50k on salary and business expenses and she has $20K of inventory on the shelves, does the credit card debt wipe out the additional inventory on the shelf to break even? Or does she have to pay taxes on $10k increase in assets, but can write off the payments to the credit card as she makes them in future years?
Since she hasn't paid off the credit debt we don't know how to include it in the cost of goods calculation for calculating her yearly profit for tax purposes or where to place the debt to remove it from profits.
Sorry if this is a dumb question, also this is a simplification and I know the finances don't look great, just trying to figure out how to deal with the debt in terms of calculating her earnings. It's the second year in business and while I want it to be successful, come tax time loosing money or breaking even sounds fine for now.
David
If she started the year with $10k in inventory and at the end of the year she has made $100k in sales, spent $50K cash and $10k credit on inventory, spent $50k on salary and business expenses and she has $20K of inventory on the shelves, does the credit card debt wipe out the additional inventory on the shelf to break even? Or does she have to pay taxes on $10k increase in assets, but can write off the payments to the credit card as she makes them in future years?
Since she hasn't paid off the credit debt we don't know how to include it in the cost of goods calculation for calculating her yearly profit for tax purposes or where to place the debt to remove it from profits.
Sorry if this is a dumb question, also this is a simplification and I know the finances don't look great, just trying to figure out how to deal with the debt in terms of calculating her earnings. It's the second year in business and while I want it to be successful, come tax time loosing money or breaking even sounds fine for now.
David
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