Cost of Sales for Hotel Industry

Essjay,

Sometimes I get confused whether something is a COGS or an expense. As an example, my used car dealer pays to ship vehicles to a customer. This is an expense if it is freight out, is that correct? But I was really wondering if this is important from an IRS standpoint? Either way, if I post as COGS or expense, it will have the same effect on net income, doesn't it? Is it critical to try to make certain that I categorize COGS and expenses exactly right for tax purposes or is it more for business owners to track their profits?

Thanks,

Diane

IoveNumbers:

Yes, outbound shipping is an operating expense.  Here is a great COGS definition:

Cost of goods for resale

Cost of goods purchased for resale includes purchase price as well as all other costs of acquisitions.^[5] This cost should reflect any discounts. Additional costs may include freight paid to acquire the goods, customs duties, sales or use taxes not recoverable paid on materials used, and fees paid for acquisition. For financial reporting purposes such period costs as purchasing department, warehouse, and other operating expenses are usually not treated as part of inventory or cost of goods sold. For U.S. income tax purposes, some of these period costs must be capitalized as part of inventory.^[6] Costs of selling, packing, and shipping goods to customers are treated as operating expenses related to the sale. Both International and U.S. accounting standards require that certain abnormal costs, such as those associated with idle capacity, must be treated as expenses rather than part of inventory.

(I underlined the pertinent details)

The only time that the IRS really cares about things like this is when they UNDERSTATE income in the current year...and realistically, it would have to amount to a significant tax difference (do not ask me to define "significant")

O, all right, I'll define it: significant is an amount that would cover their costs in collecting and probably varies according to the individual..For a taxpayer paying $20K in taxes, 200.00 may be insignificant...but for a taxpayer with a $2K liability...it is significant...

Your last question...I try to track this as close as I can to the way that makes the IRS happy...because if your client gets audited, and the IRS makes an adverse change based on your oversight......need I say more?

Thanks so much, Essjay-that is exactly what I needed to know. You are awesome and you make me laugh!!

I wish I could give you a thousand points, although you probably don't need them anyway, and I guess you can't trade them in for money :( .

Thank you, too.. .wow..I don't know what I would do with a thousand points anyhow...I would probably pretend to spend it in squanderous ways and bring heartache and misery down on myself.