Cost of Purchases vs COGS

>A. QB COGS reflects the cost of items SOLD (in the tax year), not the cost of items PURCHASED (in the tax year).....Correct?

Yes

>B. Form 1120S, Sched A, Line 2 asks for PURCHASES, which I assume should be the cost of what I PURCHASED in the tax year...correct?

Yes

I'm confused as to why you are referring to schedule A which I always thought was personal deductions. Schedule C is normally used for sole-proprietorships as I understand it. Schedule C part 3 is the inventory section if I remember right.

I don't have the tax forms handy, but as I understand it basically they are asking that you provide the value of inventory on 1/1, add purchases, deduct sales to get an ending inventory value.

Rustler

Rustler, thanks for your response.

I'm helping a friend out who owns a small S-Corp. He files form 1120S, in which the COGS data is called Sched A (but it's pretty much identical to Sched C in that it asks for beginning inven, purchases, and ending inven.....from which you then calculate COGS).

As you concurred, I want to use my actual Purchases amt to put in line 2 of Schedule A (Purchases). I got my actual Purchases from QB Purchases by Item Summary Report.

However, the accountant does not want to use my Purchases amt because it differs from the COGS sold amt on the P&L.....and therefore the resulting Net Income will not agree with the Net Income on the Balance Sheet. How can I convince the accountant to use my Purchases number?

My mistake I'm not familiar with an S-corp.

In my experience tax reporting is not going to match up with financial reporting all the time.

As an example, meals while traveling are a business expense but in tax reporting only 50% is deductible. Actual gas/repairs etc can be deducted, or you can take a general mileage deduction - in my case the mileage deduction is higher so I take it.

Considering that it makes no difference who fills out a form the person the form is for is responsible, I'd tell him to follow the directions or find another who will.

But keep in mind I am neither a tax accountant nor an accountant.

Rustler

You seem to be very knowledgable about COGS and inventory and I have a basic question that probably sounds pretty stupid. My boss is a franchisee owner and the franchise owner is charging her for items listed on their (very confusing) invoice as COGS - Billed and then the next line entry in Inventory asset fo rhte same amt. Shouldn't one of these be a credit and one of htse entries be a debit? Its 2 debits for the exact same amt. that they are saying she owes them. Is this correct?

Thanks

I'm not sure I understand, but what the vendor (the franchise owner) labels things when he invoices you is immaterial and probably reflects his account set up.

How you allocate the money spent is the key I would think. If you are buying things that are for resale then it is an inventory purchase, if you are paying for a license then it is a fee expense.

Can you be a little more specific?

To restate the original problem in this discussion, if I map my COGS accounts in QB to the tax line, "Schedule A: Purchases" (for an IRS 1120S form) AND enter BOY and EOY inventory balances in TurboTax, TurboTax will incorrectly calculate COGS. This is because QB is calculating COGS directly but the tax return wants BOY inventory, total purchases, and EOY inventory to come up with the same amount.

It seems to me that I should be able to map QB COGS directly to line 8, Cost of Goods Sold. Or, it would also work if I map it as above to "Schedule A: Purchases" but just leave out BOY and EOY inventory balances. But will that fly with the IRS?

Can anyone tell me the recommended way here? Thanks.

QB's COGS should be the same as the resulting figure on Sch. A but it won't. QB uses average inventory, which is ok with IRS if QB did the average IAW the tax laws, but of course QB doesn't. QB keeps average information for the life of the file, so the more years and purchases of an item that there are, the more off the average will be from the actual amounts spent in the current year.

I would think that after the IRS number is calculated that an adjustment entry would be the thing to do to get the statements in line with filing - but I don't know what the adjustment would be.

I tried to reply to another topic entitled, "Calculating COGS", but it's read-only so I am posting it here instead. In this other topic, MackH and Rustler were confused as to why the QuickBooks tax summary report would report COGS on a line called Purchases. The reason this occurs is when you create an account, you can map the account to a tax line. There is no default (at least I'm not seeing one). When MackH and Rustler created COGS accounts, they may have set Tax-Line Mapping to "COGS-Schedule A: Purchases". If so, that's why your COGS total appears on the Purchases line in the tax summary report.

The best conclusion I have for the problem of how to map COGS as calculated by QuickBooks to a TurboTax line is as follows. Cost of goods sold (Schedule A, line 8 in 1120S) is a calculated amount in TurboTax and so cannot be imported directly from QuickBooks. Instead one needs to manually enter Purchases (from a Purchases report filtered to include inventory items only, as Rustler suggested) and let TurboTax calculate COGS. And of course verify that the calculated COGS matches QuickBooks COGS.

Another way might be to override the calculated COGS amount in TurboTax. You can right-click a calculated amount in TurboTax and override it. I need to think about this some more.

Every year, I try to figure out this connection between Quickbooks and TurboTax in relation to COGS. What I always end up doing is leaving all Purchase accounts with no Tax Line Mapping. In other words, Tax Line Mapping = . I use for any account that needs special handling when doing Federal Taxes - including depreciation, entertainment, meals, and purchase accounts). I then print out all supporting quickbooks reports and do the figuring for the federal return by hand....