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2008 Tax Return

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2008 Tax Return

2008 tax return 2. 2008 tax return   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. 2008 tax return How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. 2008 tax return Deferral percentage. 2008 tax return Employee compensation. 2008 tax return Compensation of self-employed individuals. 2008 tax return Choice not to treat deferrals as compensation. 2008 tax return Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. 2008 tax return Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. 2008 tax return S. 2008 tax return Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. 2008 tax return Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. 2008 tax return A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. 2008 tax return SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). 2008 tax return A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). 2008 tax return Eligible employee. 2008 tax return   An eligible employee is an individual who meets all the following requirements. 2008 tax return Has reached age 21. 2008 tax return Has worked for you in at least 3 of the last 5 years. 2008 tax return Has received at least $550 in compensation from you in 2013. 2008 tax return This amount remains the same in 2014. 2008 tax return    You can use less restrictive participation requirements than those listed, but not more restrictive ones. 2008 tax return Excludable employees. 2008 tax return   The following employees can be excluded from coverage under a SEP. 2008 tax return Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 2008 tax return Nonresident alien employees who have received no U. 2008 tax return S. 2008 tax return source wages, salaries, or other personal services compensation from you. 2008 tax return For more information about nonresident aliens, see Publication 519, U. 2008 tax return S. 2008 tax return Tax Guide for Aliens. 2008 tax return Setting Up a SEP There are three basic steps in setting up a SEP. 2008 tax return You must execute a formal written agreement to provide benefits to all eligible employees. 2008 tax return You must give each eligible employee certain information about the SEP. 2008 tax return A SEP-IRA must be set up by or for each eligible employee. 2008 tax return Many financial institutions will help you set up a SEP. 2008 tax return Formal written agreement. 2008 tax return   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. 2008 tax return You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. 2008 tax return However, see When not to use Form 5305-SEP, below. 2008 tax return   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. 2008 tax return Keep the original form. 2008 tax return Do not file it with the IRS. 2008 tax return Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. 2008 tax return See the Form 5305-SEP instructions for details. 2008 tax return If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. 2008 tax return When not to use Form 5305-SEP. 2008 tax return   You cannot use Form 5305-SEP if any of the following apply. 2008 tax return You currently maintain any other qualified retirement plan other than another SEP. 2008 tax return You have any eligible employees for whom IRAs have not been set up. 2008 tax return You use the services of leased employees, who are not your common-law employees (as described in chapter 1). 2008 tax return You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. 2008 tax return An affiliated service group described in section 414(m). 2008 tax return A controlled group of corporations described in section 414(b). 2008 tax return Trades or businesses under common control described in section 414(c). 2008 tax return You do not pay the cost of the SEP contributions. 2008 tax return Information you must give to employees. 2008 tax return   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. 2008 tax return An IRS model SEP is not considered adopted until you give each employee this information. 2008 tax return Setting up the employee's SEP-IRA. 2008 tax return   A SEP-IRA must be set up by or for each eligible employee. 2008 tax return SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. 2008 tax return You send SEP contributions to the financial institution where the SEP-IRA is maintained. 2008 tax return Deadline for setting up a SEP. 2008 tax return   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. 2008 tax return Credit for startup costs. 2008 tax return   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. 2008 tax return For more information, see Credit for startup costs under Reminders, earlier. 2008 tax return How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. 2008 tax return If you are self-employed, you can contribute to your own SEP-IRA. 2008 tax return Contributions must be in the form of money (cash, check, or money order). 2008 tax return You cannot contribute property. 2008 tax return However, participants may be able to transfer or roll over certain property from one retirement plan to another. 2008 tax return See Publication 590 for more information about rollovers. 2008 tax return You do not have to make contributions every year. 2008 tax return But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). 2008 tax return When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. 2008 tax return Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. 2008 tax return A SEP-IRA cannot be a Roth IRA. 2008 tax return Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 2008 tax return Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. 2008 tax return If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. 2008 tax return Participants age 70½ or over must take required minimum distributions. 2008 tax return Time limit for making contributions. 2008 tax return   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. 2008 tax return Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. 2008 tax return Compensation generally does not include your contributions to the SEP. 2008 tax return The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. 2008 tax return Example. 2008 tax return Your employee, Mary Plant, earned $21,000 for 2013. 2008 tax return The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). 2008 tax return Contributions for yourself. 2008 tax return   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. 2008 tax return However, special rules apply when figuring your maximum deductible contribution. 2008 tax return See Deduction Limit for Self-Employed Individuals , later. 2008 tax return Annual compensation limit. 2008 tax return   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. 2008 tax return However, $51,000 is the maximum contribution for an eligible employee. 2008 tax return These limits are $260,000 and $52,000, respectively, in 2014. 2008 tax return Example. 2008 tax return Your employee, Susan Green, earned $210,000 for 2013. 2008 tax return Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. 2008 tax return More than one plan. 2008 tax return   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. 2008 tax return When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. 2008 tax return Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. 2008 tax return Tax treatment of excess contributions. 2008 tax return   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. 2008 tax return 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). 2008 tax return $51,000. 2008 tax return Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. 2008 tax return For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. 2008 tax return Reporting on Form W-2. 2008 tax return   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). 2008 tax return Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. 2008 tax return If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. 2008 tax return Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. 2008 tax return Your contributions (including any excess contributions carryover). 2008 tax return 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. 2008 tax return In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. 2008 tax return Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. 2008 tax return When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. 2008 tax return The deduction for the deductible part of your self-employment tax. 2008 tax return The deduction for contributions to your own SEP-IRA. 2008 tax return The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. 2008 tax return For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. 2008 tax return To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. 2008 tax return Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 2008 tax return Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. 2008 tax return However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. 2008 tax return If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. 2008 tax return Excise tax. 2008 tax return   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. 2008 tax return For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. 2008 tax return When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. 2008 tax return If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. 2008 tax return If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. 2008 tax return Example. 2008 tax return You are a fiscal year taxpayer whose tax year ends June 30. 2008 tax return You maintain a SEP on a calendar year basis. 2008 tax return You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. 2008 tax return Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 2008 tax return For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. 2008 tax return S. 2008 tax return Return of Partnership Income; and corporations deduct them on Form 1120, U. 2008 tax return S. 2008 tax return Corporation Income Tax Return, or Form 1120S, U. 2008 tax return S. 2008 tax return Income Tax Return for an S Corporation. 2008 tax return Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 2008 tax return (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 2008 tax return , you receive from the partnership. 2008 tax return ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. 2008 tax return Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. 2008 tax return (See the Caution, next. 2008 tax return ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. 2008 tax return This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. 2008 tax return You are not allowed to set up a SARSEP after 1996. 2008 tax return However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. 2008 tax return If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. 2008 tax return Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. 2008 tax return At least 50% of your employees eligible to participate choose to make elective deferrals. 2008 tax return You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. 2008 tax return The elective deferrals of your highly compensated employees meet the SARSEP ADP test. 2008 tax return SARSEP ADP test. 2008 tax return   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. 2008 tax return A highly compensated employee is defined in chapter 1. 2008 tax return Deferral percentage. 2008 tax return   The deferral percentage for an employee for a year is figured as follows. 2008 tax return   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. 2008 tax return Employee compensation. 2008 tax return   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. 2008 tax return Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. 2008 tax return See Compensation in chapter 1. 2008 tax return Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. 2008 tax return Compensation of self-employed individuals. 2008 tax return   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. 2008 tax return   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. 2008 tax return Choice not to treat deferrals as compensation. 2008 tax return   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. 2008 tax return Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. 2008 tax return 25% of the participant's compensation (limited to $255,000 of the participant's compensation). 2008 tax return $17,500. 2008 tax return The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. 2008 tax return Cash or deferred arrangement (section 401(k) plan). 2008 tax return Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). 2008 tax return SIMPLE IRA plan. 2008 tax return In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. 2008 tax return Catch-up contributions. 2008 tax return   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 2008 tax return The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. 2008 tax return Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). 2008 tax return However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 2008 tax return The catch-up contribution limit. 2008 tax return The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 2008 tax return   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). 2008 tax return Overall limit on SEP contributions. 2008 tax return   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). 2008 tax return The same rule applies to contributions you make to your own SEP-IRA. 2008 tax return See Contribution Limits , earlier. 2008 tax return Figuring the elective deferral. 2008 tax return   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. 2008 tax return Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. 2008 tax return However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 2008 tax return Excess deferrals. 2008 tax return   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. 2008 tax return For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. 2008 tax return The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. 2008 tax return See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. 2008 tax return Excess SEP contributions. 2008 tax return   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. 2008 tax return You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. 2008 tax return If you do not notify them within this time period, you must pay a 10% tax on the excess. 2008 tax return For an explanation of the notification requirements, see Rev. 2008 tax return Proc. 2008 tax return 91-44, 1991-2 C. 2008 tax return B. 2008 tax return 733. 2008 tax return If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. 2008 tax return Reporting on Form W-2. 2008 tax return   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 2008 tax return You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 2008 tax return You must also include them in box 12. 2008 tax return Mark the “Retirement plan” checkbox in box 13. 2008 tax return For more information, see the Form W-2 instructions. 2008 tax return Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. 2008 tax return Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. 2008 tax return Distributions are subject to IRA rules. 2008 tax return Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 2008 tax return For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. 2008 tax return Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. 2008 tax return Making excess contributions. 2008 tax return Making early withdrawals. 2008 tax return Not making required withdrawals. 2008 tax return For information about these taxes, see chapter 1 in Publication 590. 2008 tax return Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. 2008 tax return Prohibited transaction. 2008 tax return   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. 2008 tax return In that case, the SEP-IRA will no longer qualify as an IRA. 2008 tax return For a list of prohibited transactions, see Prohibited Transactions in chapter 4. 2008 tax return Effects on employee. 2008 tax return   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. 2008 tax return The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. 2008 tax return Also, the employee may have to pay the additional tax for making early withdrawals. 2008 tax return Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. 2008 tax return See Setting Up a SEP , earlier. 2008 tax return Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. 2008 tax return You must also give them notice of any excess contributions. 2008 tax return For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). 2008 tax return Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. 2008 tax return For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. 2008 tax return Prev  Up  Next   Home   More Online Publications
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The 2008 Tax Return

2008 tax return 6. 2008 tax return   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. 2008 tax return However, to determine these costs, you must value your inventory at the beginning and end of each tax year. 2008 tax return This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. 2008 tax return This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. 2008 tax return However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. 2008 tax return If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. 2008 tax return For more information, see chapter 2. 2008 tax return Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. 2008 tax return These lines are reproduced below and are explained in the discussion that follows. 2008 tax return 35 Inventory at beginning of year. 2008 tax return If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. 2008 tax return Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. 2008 tax return Subtract line 41 from line 40. 2008 tax return  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. 2008 tax return If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). 2008 tax return Opening inventory usually will be identical to the closing inventory of the year before. 2008 tax return You must explain any difference in a schedule attached to your return. 2008 tax return Donation of inventory. 2008 tax return   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. 2008 tax return The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. 2008 tax return You must remove the amount of your contribution deduction from your opening inventory. 2008 tax return It is not part of the cost of goods sold. 2008 tax return   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. 2008 tax return Treat the inventory's cost as you would ordinarily treat it under your method of accounting. 2008 tax return For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. 2008 tax return   A special rule may apply to certain donations of food inventory. 2008 tax return See Publication 526, Charitable Contributions. 2008 tax return Example 1. 2008 tax return You are a calendar year taxpayer who uses an accrual method of accounting. 2008 tax return In 2013, you contributed property from inventory to a church. 2008 tax return It had a fair market value of $600. 2008 tax return The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. 2008 tax return The charitable contribution allowed for 2013 is $400 ($600 − $200). 2008 tax return The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. 2008 tax return The cost of goods sold you use in determining gross income for 2013 must not include the $400. 2008 tax return You remove that amount from opening inventory for 2013. 2008 tax return Example 2. 2008 tax return If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. 2008 tax return You would not be allowed any charitable contribution deduction for the contributed property. 2008 tax return Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. 2008 tax return If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. 2008 tax return Trade discounts. 2008 tax return   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. 2008 tax return You must use the prices you pay (not the stated prices) in figuring your cost of purchases. 2008 tax return Do not show the discount amount separately as an item in gross income. 2008 tax return   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. 2008 tax return Cash discounts. 2008 tax return   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. 2008 tax return There are two methods of accounting for cash discounts. 2008 tax return You can either credit them to a separate discount account or deduct them from total purchases for the year. 2008 tax return Whichever method you use, you must be consistent. 2008 tax return If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. 2008 tax return For more information, see Change in Accounting Method in chapter 2. 2008 tax return   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. 2008 tax return If you use this method, do not reduce your cost of goods sold by the cash discounts. 2008 tax return Purchase returns and allowances. 2008 tax return   You must deduct all returns and allowances from your total purchases during the year. 2008 tax return Merchandise withdrawn from sale. 2008 tax return   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. 2008 tax return Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. 2008 tax return You must also charge the amount to your drawing account. 2008 tax return   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. 2008 tax return As stated above, you also use it to record withdrawals of merchandise for personal or family use. 2008 tax return This account is also known as a “withdrawals account” or “personal account. 2008 tax return ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. 2008 tax return Small merchandisers (wholesalers, retailers, etc. 2008 tax return ) usually do not have labor costs that can properly be charged to cost of goods sold. 2008 tax return In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. 2008 tax return Direct labor. 2008 tax return   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. 2008 tax return They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. 2008 tax return Indirect labor. 2008 tax return   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. 2008 tax return Other labor. 2008 tax return   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. 2008 tax return Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. 2008 tax return Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. 2008 tax return Those that are not used in the manufacturing process are treated as deferred charges. 2008 tax return You deduct them as a business expense when you use them. 2008 tax return Business expenses are discussed in chapter 8. 2008 tax return Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. 2008 tax return Containers. 2008 tax return   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. 2008 tax return If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. 2008 tax return Freight-in. 2008 tax return   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. 2008 tax return Overhead expenses. 2008 tax return   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. 2008 tax return The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. 2008 tax return Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. 2008 tax return Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. 2008 tax return Inventory at the end of the year is also known as closing or ending inventory. 2008 tax return Your ending inventory will usually become the beginning inventory of your next tax year. 2008 tax return Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. 2008 tax return Prev  Up  Next   Home   More Online Publications