Inventory is represented in the cost-of-goods-sold portion of a company's income statement as well as the asset section of the company’s balance sheet on its tax return. On the income statement, inventory is shown at two points in time; beginning inventory and ending inventory. On the balance sheet, inventory is shown as the amount of inventory on hand as of the end of the tax year. These facts hold true whether a company files Form 1120, a Corporation, or 1120S, an S-Corporation.
Things You'll Need
- Form 1120 or 1120S
- Beginning inventory
- Ending inventory
Reflect Inventory on the Tax Form
Calculate the cost of your inventory. Inventory includes raw materials, work in progress and finished goods. The cost of your inventory is not its resale value or replacement cost. It is the actual cost to you, the business owner, for the inventory.
There are several methods to determining the cost of your inventory. LIFO is an inventory valuation method which stands for Last-In-First-Out; the last inventory item purchased will be the first inventory item sold. FIFO is an inventory valuation method which stands for First-In-First-Out; the first inventory item purchased will be the first inventory item sold.
LOCOM, which stands for Lower of Cost or Market, is an inventory valuation method that results in varying tax situations based on the actual cost of the inventory and market value of the inventory. As long as the cost of inventory to your business increases throughout the year, the LIFO method will result in a greater cost of goods sold, and therefore lower tax liability for your business. The FIFO method will result in a lower cost of goods sold, and therefore a greater tax liability for your business.
Go to page 2 of Form 1120 or 1120S. Schedule A, at the top of the page, shows the detail for a company's cost of goods sold. Enter the beginning inventory amount on Schedule A, line 1. Enter the ending inventory amount on Schedule A, line 7. The difference between beginning and ending inventory will be calculated and indicate the amount of inventory utilized during the tax year.
Verify that the beginning inventory shown on Schedule A, line 1 is equal to the ending inventory on the prior year tax return in two places; Schedule A, line 7 - the prior year's ending inventory and Schedule L, line 3 - the ending inventory for the prior year balance sheet.
Enter the ending inventory on Schedule L, line 3 under column (d), "End of Tax Year".
Verify that the current year's ending inventory shown on Schedule A, line 7 is equal to the ending inventory on Schedule L, line 3, column (d).
Tips & Warnings
- If this is your company's first year in business, and therefore your first tax return, you will not have a beginning inventory value. Even if you started your business with an inventory of widgets on the shelves, the beginning inventory value will still be zero. Beginning inventory is considered as of the moment right before you started the business.
- Inventory does not include goods that have been sold but title has not passed to the buyer, goods ordered but not yet received, or goods held on consignment for others. For you to consider inventory part of your business, the goods must be able to be utilized by your business and title must be held by your company.
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