Is paint a cost of goods sold or expense?

Vertigoat · ‎December 10, 2018

I'm just curious - This is a really mysterious subject that I've researched in depth on Google but I can't come to a final answer.

I do antique furniture restoration. Some of the things I use on every single job are:

-Lacquer thinner

-Lacquer

-Sanding Sealer

-Sand paper

I don't itemize these expenses to the customer. I have no idea how much of any of these chemicals I may need to complete a job. So, here's my question:

When I purchase more Lacquer or Sanding Sealer(liquids which are sprayed like paint) for my shop, are these "expenses" or "cost of goods sold".

I am leaning toward expenses but I'm not an accountant.

Thanks!

Rustler · ‎December 10, 2018

For tax purposes COGS does mean the cost, and all costs to make, a product you sell. And the IRS has a specific formula you fill in on the form you file to calculate that number - that formula is not used in QB so you have to do some reporting to get the numbers they want.

In your books you can post to COGS if you wish, it just will not transfer to the IRS forms for the items you mention.

I prefer to keep my books per the IRS form the business files, so in that case I would create an expense account called something like, refinishing supplies expense and list it as a sub account of misc expense which is where it would transfer to the tax form. And post to that account.

View solution in original post

Rustler · ‎December 10, 2018

For tax purposes COGS does mean the cost, and all costs to make, a product you sell. And the IRS has a specific formula you fill in on the form you file to calculate that number - that formula is not used in QB so you have to do some reporting to get the numbers they want.

In your books you can post to COGS if you wish, it just will not transfer to the IRS forms for the items you mention.

I prefer to keep my books per the IRS form the business files, so in that case I would create an expense account called something like, refinishing supplies expense and list it as a sub account of misc expense which is where it would transfer to the tax form. And post to that account.

Vertigoat · ‎December 10, 2018

Ok, I'm confused. So you propose to scrap cogs all together and list materials as expense? What is the taxation difference between cogs and expense?
And what do you mean when you say "In your books you can post to COGS if you wish, it just will not transfer to the IRS forms for the items you mention."?

Rustler · ‎December 10, 2018

When you file taxes, as you stated, the IRS has you calculate COGS from inventory sold - you do not sell inventory

as far as the bottom line on the P&L there is no difference, COGS is an expense account like all the others, it is just called out separately because the IRS treats it special

You can post expenses in your accounts as you wish, calling them what you wish, but in an audit the closer you are to following the tax form set up for accounts, the easier it will be for you to find what they are asking about

Vertigoat · ‎December 10, 2018

Ok, so let me make sure I am understanding this. If I purchase a gallon of lacuer, that's not really cogs because that gallon of lacquer may be used across 18 different customer jobs. So, in this case I would create a separate expense account named whatever, to keep track. right?

Rustler · ‎December 10, 2018

I would, yes

Vertigoat · ‎December 10, 2018

Thank you!

Rustler · ‎December 10, 2018

You're Welcome

wendalls · ‎December 10, 2018

I would think cogs as you are selling it to a customer. Electricity is an expense ec

Vertigoat · ‎December 10, 2018

So would it be fair to say that pretty much any tangible object/item necessary to perform work for a customer is a cogs? This gets confusing to me because Turbo Tax wants to associate cogs with inventory and I'm not a retail store. I don't have an "inventory". I'm not really purchasing things and reselling them. Technically, in my example, I am reselling lacquer but not in the resale sense.

john-pero · ‎December 10, 2018

An old question, but a new take on it from perspective of filling out page 2 of Schedule C many times over.

COGS is inventory dependent i.e. at year end the cost of all items purchased and consumed, such as paint, thinner, etc is adjusted for the cost of all the same on hand and unsold as of 12/31 or whenever your fiscal year ends. Thus you could easily and justifiably expense all purchases of consumables during the year as "Supplies", making an annual inventory adjustment

Example, on 1/1 you start business and have zero supplies on hand. During the year you spend $10,000 on paint - straight expense it as you pay - but as of 12/31 when you count inventory you still have $5000 of supplies on the shelf. Your purchased supplies (10,000) minus your inventory on hand (5,000) is your COGS (5,000)

Presuming you may not have placed these purchased supplies into a tracking inventory account you, on 12/31, would move $5,000 of prior supplies expense into a Other Current Asset account for inventory on hand. As long as you make this yearly adjustment it will satisfy the intent of COGS and then you do not have to worry about down to the penny what each individual ljob made as far as profit or loss.

qbteachmt · ‎December 10, 2018

john.pero is describing Periodic Inventory. That means, in QB, you are not using Inventory Item names for any of this and you will post to a different asset account that your Inventory Items use, to avoid mixing that data. Using QB's own Inventory Item names and function = Perpetual Inventory.

You can look those two methods up on the web and at the IRS.

Also, ask your CPA.

Periodic Inventory is easiest when you hardly keep anything in stock over a significant length of time = quick turnover.

Anonymous · ‎December 20, 2018

I'm in a very similar situation.

I had been expensing the paint, but now want to include it in COGS because I'd like to monitor an accurate profit margin. I like the convenience of just expensing it for taxes though.

Anyone know an easy way to get the best of both worlds? I know I can do the math by hand, but would rather let the machine do it!

qbteachmt · ‎December 21, 2018

@Anonymous

Use Items (desktop) or Product/ Services (QB Online) for this, as Two Sided.

I create Noninventory items named for what I want to track, buy, sell and see on reports, and now I got to link it to Expense and to Income. That way, I only need the one expense account for Job Materials and one income account for all Sales revenue. I can have, for instance:

Exterior

Interior

Trim

Primer

Deck Seal

As generic or specific as I want. Put this item listing on the purchase: the check or bill or credit card charge, note the customer:job (project) it is for, directly. And it is Billable or not, accordingly to the sales contract with that customer. Also, use the item even if this just supplies not job tracked to the customer, such as Primer is used where needed until you run out and buy more.

Now you will also sell to customers. That can be the directly billable costs, it can be a fixed contract bid, or the service item can even be priced per square foot.

And now you don't run the P&L. You run Customer Profit reports, and item Profit reports.

This way, the accounting is Plain and mostly matches the tax form. Sales and Item based reporting give you your Details.

Please see my attachment, from desktop.

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Is paint a cost of goods sold or expense?