This year, Sarah started a business selling unique kitchen items both in stores and online.She purchased $70,000 of goods during the year.Her ending inventory was $8,000, and she owed suppliers $15,000 at year end, including for all of the ending inventory.For tax purposes, Sarah adopted the cash method and the treatment of inventory as nonincidental supplies.Her deduction for inventory for the year is:

Question

Quizplus · Accepted Answer

Under the cash method and treating inventory as nonincidental supplies, Sarah can deduct the cost of goods sold (COGS) when they are actually paid for, not when they are sold. Since she owes $15,000 to suppliers at year-end, which includes all of the ending inventory ($8,000), she has not paid for these goods yet. Therefore, her deduction for inventory is the initial purchase ($70,000) minus what she still owes ($15,000), resulting in a $55,000 deduction.

This Year, Sarah Started a Business Selling Unique Kitchen Items