I own a (very) small business. (Less than $10,000 a year). I recently found out that small businesses are now allowed to
I own a (very)...
I own a (very) small business. (Less than $10,000 a year). I recently found out that small businesses are now allowed to "Treat inventories as nonincidental materials and supplies or use an inventory method that conforms to their financial accounting treatment of inventories (Sec. 471(c))". Do I need to fill out a Form 3115 in order to take advantage of this? I looked at the instructions for From 3115 and it says: DCN - 50 “Small taxpayer ($1 million) inventory exception (section 471)—for a qualifying applicant with average annual gross receipts of $1,000,000 or less (see Rev. Proc. 2001-10, 2001-1 C.B. 272), from the present method of accounting for inventoriable items (including, if applicable, the method of capitalizing costs under section 263A) to treating inventoriable items in the same manner as materials and supplies that are not incidental under Regulations section 1.162-3. Complete Schedule A, Part I, and Schedule D, Parts II and III, of Form 3115, as applicable. See section 22.03 of Rev. Proc. 2018-31. Note. This change does not apply for any tax year beginning after December 31, 2017.” What does it mean that the change does not apply for tax years after 2017? Does it mean I'm not allowed to make the change since it is after 2017, or does it mean I may make the change, but am not required to file Form 3115? Thank you!
Hi, let me see if I can assist. Based on the stated sales level, inventory is normally handled on cash accounting. Form 3115 is an all purpose form to change accounting treatments, and inventory is high on the list. The first part of the "Treat inventories...." indicates inventory costs are not expensed. The other part is about using an accrual method. In my opinion, this is something to consider at a time when the business grows significantly.
Right now I am tracking each item individually. I believe being able to treat them as non incidental materials or supplies would make my work load more manageable. Am I required to fill out a Form 3115 to make this change?I'm not sure what you mean by "inventory costs are not expensed."
When inventory is purchased, it is not charged as an expense. It is the purchase of an asset that will be sold later.
Form 3115 can be completed and submitted. It does not require IRS approval to use the requested accounting change, however if denied at a future date, actions to restore the old system will be advisable.
right now I am am not charging inventory as an expense until it sells. (Cost of goods sold.) Is that what you mean?
Yes, it is a purchase, only the cost of goods is recognized when sold.
Correct. My understanding is that small businesses are now able to count inventory as an expense at the time of purchase, rather than waiting to expense it at the time it sells.I'm trying to figure out what I need to d to be able to take advantage of that change.34;Taxpayers may account for inventories as nonincidental materiel s or supplies" as of 2017.Am I required to file the 3115 for this?Are you still available?Should I go ahead and rate your service? I don't believe my question has been satisfactorily answered yet.
My question was not satisfactorily answered, and the consultant stopped responding.
I am back, we are not always online at all times.
OK, my apologies!I'll be happy to change the rating if the system will allow me!Are you able to follow up on my question?
As stated earlier, you can file the Form 3115. You do not have to wait for IRS to approve the change. In my opinion, the business is not having the sales volume where this will make any impact. When it grows significantly above the stated sales level then it may. If IRS denies this change, be prepared to revert back to the old system. Thanks for visiting and unfortunately ratings are not subject to change.
This website addresses the topic: https://www.journalofaccountancy.com/issues/2019/jan/small-business-tax-accounting-methods.html
The choice to do so is with you, should you want a second opinion, you can request one. Thanks.
I understand that I can file the form and do not have to wait for IRS to approve change, but I am wondering if I am REQUIRED to file the form to make that change.
Any change to accounting methods requires Form 3115. It is a multi-purpose form.
OK. Thank you. When you refer to "any impact," are you speaking of financial impact or time-impact? Right now I am concerned with the time it takes to track each item as inventory and am thinking the new method would save time.Thank you for your help.
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