Inventory counted as supplies in 07

[Kea]

New self-employed client sold furniture in previous years. Her last years' return shows $7000 supply expense, but no assets, inventory or COGS. Due to illness of spouse, my client did not conduct any business in 2008 and may not resume that business. However, she had bought furniture in 2007 that she has not sold. The previous preparer included these purchases in "supplies." How do I reclaim these expenses that are now not legitimate? Granted it should never have been counted as supplies in the first place. Do I show income for the value of the remaining furniture - say, by her buying her own furniture for personal use? Do I show a negative value in supplies - implying they were "returned"? I'm not sure I want to recommend amending last year. I'm afraid it might open a whole can of worms.

The additional income this year will not affect her, since she has an $11K NOL from 2007 carrying forward to 2008. There is no W-2 income, only 1099R income and Social Security.

How would you handle?

Thanks

[grandmabee]

New self-employed client sold furniture in previous years. Her last years' return shows $7000 supply expense, but no assets, inventory or COGS. Due to illness of spouse, my client did not conduct any business in 2008 and may not resume that business. However, she had bought furniture in 2007 that she has not sold. The previous preparer included these purchases in "supplies." How do I reclaim these expenses that are now not legitimate? Granted it should never have been counted as supplies in the first place. Do I show income for the value of the remaining furniture - say, by her buying her own furniture for personal use? Do I show a negative value in supplies - implying they were "returned"? I'm not sure I want to recommend amending last year. I'm afraid it might open a whole can of worms.

The additional income this year will not affect her, since she has an $11K NOL from 2007 carrying forward to 2008. There is no W-2 income, only 1099R income and Social Security.

How would you handle?

Thanks

there is a special rule for cash taxpayers not using inventory and taking it as supplies.

[Kea]

I know the law you are speaking about. They do fall under the $1million cap. (I would have counted it as COGS.) But how do I now "un-deduct" this prior expense for items not sold? Especially if the business is not continued.

[DANRVAN]

I know the law you are speaking about. They do fall under the $1million cap. (I would have counted it as COGS.) But how do I now "un-deduct" this prior expense for items not sold? Especially if the business is not continued.

Sounds like you need to amend your client's 2007 Schedule C and form 1040.

Good luck,

Dan

[Terry D EA]

"my client did not conduct any business in 2008 and may not resume that business. However, she had bought furniture in 2007 that she has not sold. This should have been inventory. How can you count this as COGS when they were not sold? The previous preparer included these purchases in "supplies." I am not 100% sure if the furniture would have been listed as inventory on the Sch C that the income/loss would be the same. If it would, I would't try to reclassify and amend. Convert the furniture back to personal use and the gain will offset some of the loss.

Terry D.

[Kea]

Terry, you are correct. I didn't think my statement through. The Schedule C clients I have helped only buy their materials / goods as they use them I've not done one that maintains an inventory before.

But I do agree the furniture needs to be converted to personal use. I'm just not sure where to report that - income, supplies (as a negative) or somewhere else.

Thanks