Surviving an I.R.S. audit - Cost of Goods SOLD and Jail House Orange - A Fashion Accessory Nightmare
If the I.R.S. asks you to bring your Cost of Goods Sold from two years ago. Are you ready? An I.R.S. audit causes lots of anxiety. They earn their reputation. My vivid imagination, normally a fantastic creative asset, revved into the red zone as I imagined myself in jail house orange - a fashion accessory nightmare.
Double and triple checking my Cost of Goods Sold took hours of work and lots of help to get ready. Sure, I had good Inventory Records, but they were encrypted in "Harriete lingo" (i.e. no shape to hand over to the I.R.S.). While I could interpret what and where everything was, auditors prefer to see rows and columns in spread sheets that clearly add up to the numbers on your tax return.
And here is what I learned this year. Your Finished Goods (discussed in the previous post) becomes Cost of Goods Sold (COGS) only after it is sold. Duhhhhhhhh......
Most artists just move an item from their Inventory to SOLD. Done. Calculating Inventory is magic or subject to their creative imagination.
NOW THINK LIKE THE I.R.S.:
The IRS only wants to see clear and accurate records and neat rows and columns of numbers.
The I.R.S. wants to see how you calculated your Cost of Goods Sold.
The I.R.S. wants to see unmistakable evidence that you are acting in a business like manner.
So, month after month, year after year, the cost of your Finished Goods for each finished piece keeps adding to your Inventory. By keeping an ongoing Inventory Record for each artwork or piece, the rest of this accounting becomes a lot easier.
Finally, when you sell a finished piece/artwork, you know exactly how much it cost you, right? The Finished Goods number becomes the Cost of Goods Sold for that piece. You already wrote the amount down in your Inventory Record.
Repeat, the dollar amount for Finished Goods now becomes the "Cost of Goods Sold" for the piece. You subtract the amount from Inventory and add it to the end of year total for Cost of Goods SOLD. Voila! you've calculated your Cost of Goods Sold for the year.
AOL Earrings by Harriete Estel Berman