Hi Wayne: I own a Video Store which I bought last year. I used “taxcut” to do my taxes but realized too late that I was over my head. Someone is probably going to have to look at them. I completed and paid my taxes on time even though there may be errors.

I’m confused about my inventory. Do I show it on the balance sheet and taxes as inventory or just depreciate it as a depreciation expense?

The inventory of a video store is for rent and “used” rather than sold. When I bought the business, most or all of the purchase cost was inventory, so is that “start up cost” which depreciate over 5 years or inventory which can bedepreciated quicker?

Can I section 179 as much of my purchases each year as the irs allows?

Neal Martin

Hi Neal:

Thanks for writing. You’ve got some good questions here.

Q1. “I’m confused about my inventory. Do I show it on the balance sheet and taxes as inventory or just depreciate it as a depreciation expense? When I bought the business, most or all of the purchase cost was inventory, so is that “start up cost” which depreciate over 5 years or inventory which can be depreciated quicker?”

A1. Inventory is reported as an asset on the balance sheet. Inventory is never depreciated as depreciation expense. Rather, it is expensed (at wholesale cost) in the year that the product is sold to the customer. When the product is sold, the wholesale cost is transferred from the Inventory account to the Cost of Goods Sold account.

Q2. “Can I section 179 as much of my purchases each year as the irs allows?”

A2. It depends on what you mean by “purchases.” You cannot Section 179 your inventory purchases. As mentioned above, inventory is only deducted when the product is sold. Any unsold inventory remains on the balance sheet as of the end of the year.

But many other fixed assets (like office equipment, computers, printers, etc) with a useful life of more than one year can be fully deducted (via Section 179) in the year of purchase, up to $25,000 in 2003, provided you meet certain criteria, such as a) Your total purchases of fixed assets do not exceed $200,000 in a single year and b) your Section 179 expense does not create or increase a loss; i.e. you can only take the Section 179 deduction to the extent of your business profit.

For what it’s worth (and hopefully this next comment will provide some consolation to you), many small business owners try to tackle the bookkeeping/tax return prep chore and, like you, realize they are “in over their head.” Your experience is very common.

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Sincerely,
Wayne

Wayne M. Davies is author of 3 tax-slashing
eBooks for small business owners and the self-employed. For a
free copy of Wayne’s 25-page report, “How To Instantly Double
Your Deductions” visit http://www.YouSaveOnTaxes.com