Tax Law (Questions About Taxes)/inventory

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Question
Hi John: thank you for answering my question. My wife and I own a small collectibles business as an LLC. I have been told we cannot report on a cash basis since we have inventory. My problem is that we plow virtually everything back into the business to keep buying inventory. In our type of business it might be 10 - 20 years before we sell some items and, since a lot is sold at auction we have no idea what it will eventually sell for. So my problem is that every year our inventory keeps growing so our tax bite gets bigger and bigger but since we take out no cash from the business, we are faced with paying the taxes out of our personal savings which we can't do much longer. Isn't there someway to do this on a cash basis so we pay as we eventually start taking proceeds as we approach retirement? Thank you for your help.

Answer
Ron,

Thanks for your question. You haven't been talking to the right people.

If a business produces, purchases, or sells merchandise, the business must keep an inventory and use the accrual method for sales and purchases.The accrual method for businesses with inventory
is not required under certain rules.The following businesses can use the cash method of accounting, even if they have inventory.

1) The taxpayer has average annual gross receipts of $1 million or less for each tax year since 1998, and the taxpayer is not a tax shelter (Rev. Proc. 2001-10). The average gross receipts
for any year is determined by adding the gross receipts for a particular year to the two preceding tax years and dividing the total by three.

2) The taxpayer has average annual gross receipts of $10 million or less for each tax year since 2000, the taxpayer is not a tax shelter, and the principal business activity is an eligible business. (Rev. Proc. 2002-28. Under number (2) above, an eligible business is one with a principal business activity described in a North American Industry Classification System (NAICS) code that is not one of the following.
•   Codes 211 and 212 (mining activities).
•   Codes 31 – 33 (manufacturing).
•   Code 42 (wholesale trade).
•   Codes 44 – 45 (retail trade).
•   Codes 5111 and 5122 (information industries).

Examples of industries that qualify for the $10 million exception include agriculture, construction, transportation, and any of the service type businesses with codes 52 and above.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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