OT - Tax Return Question

[BobC]

Originally Posted by Eric72

I opened an eBay store in 2021. In order to properly file a tax return, I'll be entering beginning and ending inventory totals.

My question seems simple; however, I've learned this is seldom the case with anything tax-related. For the sake of keeping this post brief, let's say I decided to turn my sports card collection into my inventory.

Should I only list as inventory the items I currently have listed for sale?

I've created literally thousands of eBay listings this year. I plan to list thousands more. All the items (there are actually vinyl records, comic books, etc.) are inventory, in the truest sense of the word. However, I haven't been able to list them all yet. There is only so much time each day.

Eric,

First off, what kind of tax return are you planning to file for the business, Schedule C that goes along as part of your individual Form 1040 tax return? Assuming so, and based on your statement that you just started your business in 2021, that likely means you were not yet in business as of 1/1/2021, in which case your opening inventory on Page 2, Line 35, of your Schedule C form should be $0. Line 36 is the one that asks for the amount of Purchases you made during 2021. In your case this wouldn't necessarily be purchases you made this past year, this should be the total tax cost basis of all the items you've acquired over the years that you've now decided to contribute to your new business as sales inventory.

Your specific question then is if you should include as Purchases the tax cost of everything you've ever bought and collected, or just the tax cost of items sold or listed for sale sometime during 2021. You can honestly do it either way, but for your own specific purposes you should ask yourself a few questions first:

1. Are you really going to sell off absolutely everything you've ever collected?

2. Is there absolutely no chance you'll ever change your mind and end up keeping some things as collectibles long term?

3. There is absolutely no chance you'll be acquiring/buying any new collectibles while selling everything off, nor possibly decide to start collecting again?

4. You already have the tax cost basis for everything you've ever collected/acquired all listed and spelled out?

If you can truly answer yes to all these questions, I guess go ahead and just consider everything you have as business inventory and put the total tax cost basis of everything down as Purchases on Line 36. But if you answer no to any of these questions, I would only put the tax cost basis of items you had sold and listed for sale in 2021 down on Line 36. You can then record items you initially list for sale as Purchases on future Schedule C forms then.

Personally, even if I answered yes to all the questions, I'd still only report the items I'd sold or listed for sale as purchases in 2021. That way it provides some flexibility in case I changed my mind about collecting again, or other circumstances changed, like my passing away. If I pass and everything is in inventory, I end up leaving an ordinary income asset to my family/heirs. Whereas, anything not yet transferred to the business would likely get long term capital gain treatment for the family/heirs. And the Basis Step-Up inheritance rule is one that has already been talked about as possibly being removed at some point, which could potentially result in having a collection treated as totally business inventory subject to ordinary income, not as favorable tax-wise. It may never happen, but why take the chance if you have a choice, and there really isn't any downside. That's why they call it tax/estate planning.

Regardless of which way you ultimately decide to go, the ending inventory amount you're going to report on Line 41 of Schedule C is basically a plug figure to get Line 42 to equal the Cost of Goods Sold you can then deduct against sales for the tax year. And if you do decide to not list everything as inventory right now, you are correct in that your ending inventory on Line 41 is basically your tax cost inventory basis for all the items you listed for sale during 2021, that did not sell in 2021.

Also, for Line 33 I'd check Box A if it were me.

Hope this helps, and let me know if you need further assistance. Good luck.