If your business sells merchandise, you will need to calculate and report the cost of goods sold on your income tax return. However, if you only provide services, these calculations aren’t necessary.
Last week I looked at a profit and loss statement submitted by a retail client to use for preparation of his 2011 income tax return. The first thing I saw was a giant red flag – one the size of a football field! The number indicating his cost of goods sold was equivalent to 93% of sales. That high of a number tends to indicate theft, a casualty loss or really stupid business sense--none of which I believed to be a factor with this client. I took a look at the balance sheet and found the culprit for the massive cost of goods: there was nothing listed for inventory.
Often, a business owner--or worse yet, an unqualified bookkeeper--mistakenly lists every inventory purchase as cost of goods sold rather than as inventory. This distorts that expense item and results in an erroneous bottom line. Worse yet, if the tax pro doesn’t question it, it will send up a red flag at the IRS and you can bet an auditor will be knocking at your door. ... Read more from Fox Business