Q&A: Is my inventory deductible on my tax return?
QUESTION: When reporting net income for online book sales on Amazon, do I need to subtract the cost of the book, or only the miscellaneous expenses like postage, mailing containers, etc.? If the cost of books is deductible, how would I figure their current fair market value? For example, say I bought a book for $10 two years ago, and now I'm selling it. Do I deduct $10?
ANSWER: It's a real challenge for online used booksellers to calculate their "costs of goods sold," which is deductible from your income. I'll give you my thinking, but remember I'm not a tax advisor. It's a little late for this year, and for next year I'd recommend having a professional examine your situation.
The IRS has lots of complicated rules about this for retail businesses. If you're a retail bookstore and you're selling new books, you don't deduct the cost of all the books you bought for inventory, unless you also sold those books during the year. In other words, if you bought 100 books during the year for $1 each, and sold 50, you'd only be able to deduct $50 (plus the other expenses like postage). You'd have to deduct your other $50 in book-buying expenses in future years as that portion of your inventory sold.
Used bookselling doesn't really fit into this mold of retailing. We pay all sorts of odd values for our books, and their value is dynamic -- the market prices change every minute of the day. And at any given time, we might decide that half our stuff is worthless, and toss it in a dumpster.
My impression is that the vast majority of online booksellers account for their business simply as a cash business. In other words, they deduct all their business expenses (buying books, postage, storage, etc.) in the year they pay those bills. All of those annual expenses are considered the "cost of goods" and deducted from the gross profit for that year, even though this isn't permitted with a regular retail business.
I suppose you could argue that online bookselling isn't a retail business, it's a service.
I'd recommend you have a professional look at your situation and recommend a bookkeeping and income-reporting routine that you'll be able to stick with year in and year out.
ANSWER: It's a real challenge for online used booksellers to calculate their "costs of goods sold," which is deductible from your income. I'll give you my thinking, but remember I'm not a tax advisor. It's a little late for this year, and for next year I'd recommend having a professional examine your situation.
The IRS has lots of complicated rules about this for retail businesses. If you're a retail bookstore and you're selling new books, you don't deduct the cost of all the books you bought for inventory, unless you also sold those books during the year. In other words, if you bought 100 books during the year for $1 each, and sold 50, you'd only be able to deduct $50 (plus the other expenses like postage). You'd have to deduct your other $50 in book-buying expenses in future years as that portion of your inventory sold.
Used bookselling doesn't really fit into this mold of retailing. We pay all sorts of odd values for our books, and their value is dynamic -- the market prices change every minute of the day. And at any given time, we might decide that half our stuff is worthless, and toss it in a dumpster.
My impression is that the vast majority of online booksellers account for their business simply as a cash business. In other words, they deduct all their business expenses (buying books, postage, storage, etc.) in the year they pay those bills. All of those annual expenses are considered the "cost of goods" and deducted from the gross profit for that year, even though this isn't permitted with a regular retail business.
I suppose you could argue that online bookselling isn't a retail business, it's a service.
I'd recommend you have a professional look at your situation and recommend a bookkeeping and income-reporting routine that you'll be able to stick with year in and year out.
posted by Steve Weber at 4/11/2006
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