Help request re: taxes

Graham

I have done first years "proper" tax return, however it led to some questions going forward… I think it's killing any idea of a business, i've had to remove all sets as they were purchased in the UK before we moved over, so if sold the profit would have no cost.

In this example some of the math is slightly flawed, however I hope someone can see the problem and advise me?

How do you work out "cost basis"? How do you enter "cost basis" of Minifigs?

I realize the example is extreme and theoretical however,
_____________________________________________________________________________________________________________

Take a set with 1000 parts that cost $100 (cost basis ¢10 per part) in that set there are also 5 mf's.

parting out with a total anticpated sales price of $200 and the mf's at $5 each = $25 = grand total of $225

assuming all the parts and mf's are sold that = "profit" (not including fees and costs) of $125
______________________________________________________________________________________________________________

now assume all mf's sell = $25

and the set has 990 parts that are "worth" ¢2 = $18.80

and 10 that are "worth" $18.02 = $180.20

of those 1000 parts only the 10 @ $18.02 sell = $180.20

Total sales of mf's + 10 parts = $205.20

if the cost basis of all parts is ¢10 then 4parts x 5 mf's = $2 and the 10 parts @ ¢10 = $1

then the cost is $3 sold for $205.20 **looks** like a profit of $202.50 (not including fees and costs)

multiply this and gets worse and worse!!

What am I missing? Thanks!

misbi

When you sell those other 990 2c parts, they'll each generate an 8c loss to offset against the high profits generated by the valuable parts

Graham

OK - I kinda get it - do you get "cost basis" (it took a long time to sink in what it meant) on each set you add.

i.e. set with 1000 pieces cost $100 "cost basis" is ¢10 per piece

next set 500 pieces cost $100 thus ¢20 per piece

next set 2000 pieces with 10 minifigs costing $200 - what happens now? Do you assign a "cost basis" to the mf's then the rest of the parts separate?

It seems hellishly complex, and I have no idea how to keep track - I have stopped adding sets until I can get my head around it all :-?

How in the world do you keep track of what parts have sold from each set unless you add the same part n times (where "n" is the number of sets parted out)

Then what happens as you change prices which will happen during most upload's via BrickStock, and then if you merge items with a different "cost basis" (#1 is 1000 parts @ 10¢ pp… #2 is 500 parts @ 20¢ pp) when it's the same part but with a different "cost basis"

Thanks in advance!

Teup

Why would you want to know all of this, is that really required? I just keep track of how much I spend and how much I earn..
That way you don't know exactly how much you sold and how much is left in stock, but that's not a huge problem. Over here it's OK if you simply estimate your stock value and you'd be able to defend your estimate should they go and check.

Graham

@Teup - well it all came to a head when I had to do a tax return incorporating this "hobby" - with turnover as high as it (was) figures would suggest a massive profit (by my standards - 5 figures), after taxes prepared by a professional (Jackson Hewitt) I showed a substantial loss. But that was using best guess (as I had been doing what you are). I have been told to keep "better" accounts, or face a likely audit!

misbi

Personally, I wouldn't calculate part cost price by dividing the set price by the number of parts. IMO it's a fundamentally flawed basis as illustrated in your example above (more so with Technic sets - Power Functions components vs Technic pins for example). It doesn't take long for the basis to fall apart under scrutiny.

Consider using available part out value and price guide info to provide a 'value weighting' for individual parts. It's a much more accurate way to calculate your cost price per part.

Then, if you always sell at a cost x n, the calculation for tax is relatively simple!

Graham

Thanks brickcounter

Any tips and tricks on how to do "value weighting" - I am really feeling like a lost fish at the moment.

and how do I backtrack with 160+k parts and 100+ sets (that ive removed from sale due to all this!)

I mean this is plastic toy parts, how/why in the world does it have to be so complicated?!?!

I'm neither much good with a computor nor at being an accountant!

best Graham

misbi

Value weighting:

(Price Guide Average for part/Part Out Value for set)*your cost price for set = your part cost price

Part out set into a BL stockroom, download as csv, import into spreadsheet, apply above formula

bluedragon

I keep it simple. At the end of the year, I calculate the following (actually as I go along):
1-total cost of sets used for parting out
2-total number of parts in those sets (I assume all parts have the same value, including whole minifigs, baseplates, etc.)
3-from 1 and 2 I calculate the average cost per part
4-total income from selling parts
5-inventory value at start of year (from previous year)
6-inventory value carried over to following year (based on the total number of parts in stock and average cost per part)

I don't see the problem in a technic pin having the same cost as an expensive minifigure. I make a loss on the pins and substantial profit on the minifig.

DadsAfol

We do more like bluedragon, which is estimate the aggregate cost of purchase compared to amount of inventory added to store. We purchase from multiple different sources so this is the best way for us to calculate a cost basis. And to answer Teup's question, it is required to know this for US tax preparation. Your inventory is an asset, and if that asset increases year over year, you have a paper profit (regardless of cash flow). So its in your best interest to carry your inventory for tax purposes at the cost basis value, not the total current inventory (retail) value.

OvertheBrick

Hmm maybe I was trying to be too scientific on this.

Are you saying basically (total money spent on all sets) / (total number of parts in all set) = price per part ?

(price per part) * (number parts in inventory) = inventory cost basis value ?

You'd better give away all those pins right before the tax season

bluedragon

^yes- that's the way I do it.

genteelfrog

We also do our inventory accounting as Dads and bluedragon have outlined - it's a fair method because you're counting as your retained inventory all the remaining technic pins valued at .10/part (for example) when they're worth .01 cents, and all the minifigs and higher priced stuff at the same when they're worth more -- it's easy for the IRS to see that you're not trying to weigh things in your favor or theirs.

I started online selling as a bookseller - I'd buy a hundred used books for $200 or whatever and some of them were worth $100 each and some were worth $10 and some were worth a few bucks maybe -- I did the same inventory cost average there, same idea.

misbi

Surely that results in 'front loading' of tax paid as all the most sought after parts with the highest profit shift quickly, creating maximum possible tax due, while all the loss making parts accumulate at the bottom of your inventory, seldom selling, so never really fully offsetting your profits with a balancing loss. Tax man is bound to be happy with that arrangement.

Using a weighted cost price allows exactly the same percentage of profit for all parts, which results in far less tax payable on the fast turnover / high value items. Consequently, there's no need to offload Technic pins etc at 10-a-penny just to create a balancing tax loss.

Granted, the way that the majority of you guys are doing it looks simpler, but I suspect that it comes at a significant (avoidable) price.

Teup

@Teup - well it all came to a head when I had to do a tax return incorporating this "hobby" - with turnover as high as it (was) figures would suggest a massive profit (by my standards - 5 figures), after taxes prepared by a professional (Jackson Hewitt) I showed a substantial loss. But that was using best guess (as I had been doing what you are). I have been told to keep "better" accounts, or face a likely audit!

Sorry to hear that If you have a nice piece of database software and/or you are or know a programmer, you could actually do this 100% correct, but it's a bit of a stretch..

Divide part out sale value of a set you're adding by the cost price: this gives the profit margin (e.g. 2.1)

Then, divide sale price per item by this profit margin number. This gives you the cost price per item. This way, a Darth Vader will not have the same cost value as an 1x2 plate as discussed by others above. And all costs together will still add up to the exact price that you've paid.

Now the same parts will occur in multiple sets, and as a consequence they will have different cost values because the source is different. You'd need multiple entries in the database, that are somehow merged when porting to BrickOwl, or subordinate info fields per item that keep track of the different quantities per source (and, for example, always substract from the lowest first until it is depleted, remove the entry, and go on to the next).

This is the only 100% "correct" way I can think of, but it'd require software especially designed for all of this.

If you just want to improve slightly on the ordinary way of keeping track of sales, expenses, and estimating stock, you could keep track of part outs you've been doing and what the profit rate was. This is what I do at the moment. If it turns out that over, say, a year of business, the average profit rate is 2.1, and you know the total sale value of your entire stock, you can then make a better educated guess at the stock value (sale price divided by average profit rate). Actually, if you do this right from the start of the business, you could argue that the number is pretty much "correct". Well, not really, because parts rise and drop in value but... how much more can you expect a mortal seller to do, really!

genteelfrog

Surely that results in 'front loading' of tax paid as all the most sought after parts with the highest profit shift quickly, creating maximum possible tax due, while all the loss making parts accumulate at the bottom of your inventory, seldom selling, so never really fully offsetting your profits with a balancing loss. Tax man is bound to be happy with that arrangement.

Using a weighted cost price allows exactly the same percentage of profit for all parts, which results in far less tax payable on the fast turnover / high value items. Consequently, there's no need to offload Technic pins etc at 10-a-penny just to create a balancing tax loss.

Granted, the way that the majority of you guys are doing it looks simpler, but I suspect that it comes at a significant (avoidable) price.

There's a simple fact to maximizing profits that negates this potential problem: price your desirable items on the high side of market, because they will sell anyway even if it takes a bit more time, and price your less desirable items on the low side of market (and sometimes even well below market if they're really undesirable), because the faster you clear money on them the faster you can use that money to acquire more desirable items.

There is nothing worse for a LEGO store, or a book store, or any store, than to sell all their desirable items up front even at "market rates" but stick themselves with a growing and less and less desirable inventory, even at "market rate". Much better to offload the less desirable at a brisk rate and have a more and more desirable inventory as you grow.

Stragus

Now the same parts will occur in multiple sets, and as a consequence they will have different cost values because the source is different. You'd need multiple entries in the database, that are somehow merged when porting to BrickOwl, or subordinate info fields per item that keep track of the different quantities per source (and, for example, always substract from the lowest first until it is depleted, remove the entry, and go on to the next).

That's totally unnecessary, just merge the cost values proportionally to the quantities being merged. You don't need a queue of multiple entries.

Assuming you can keep up-to-date "My Cost" statistics, it becomes fairly easy to see what the remaining inventory is worth (as "your cost", not sale value). The sale prices will fluctuate constantly, but this should have no value on your inventory valuation. Your inventory is worth what you paid for it, and profits are generated only when stuff sells.

No need to over-complicate things .

brickfeverparts

Stragus

Your inventory is worth what you paid for it, and profits are generated only when stuff sells.

@Stragus, thats not true im affraid.

Your inventory is worth what you need to pay the day of accountings made.

I buy a (for example) 10214 tower bridge in 2013 for 199.95 incl VAT
(i didnt sell it the entire year)
LEGO decided to lower the price in 2014 to 179.95, wich means my set is worth just that!

When we count our inventory / stock at the beginning of the year, we take all counted data and value for last price paid for an item, thats at least the way it needs to be done in Holland.
sometimes your Lucky and sometimes your not.
(this only applies when stock/items dont change for longer then a year, and only on year accountings, month to month accounting is ofcourse just invoices paid and invoices received)

I do agree its all easier when just merge prices and qty's, it is impossible to do accountings when every part has 5 prices, thats even forbidden in Holland on yearly book keeping.

genteelfrog

Just one last quick comment - as can be seen from the differing opinions and the differing reports of what is required by various countries, it's a good idea to get tax advice from a qualified professional rather than random internet opinions. In the U.S., based on my work in a tax office for about five years at one point, I'd recommend talking to an Enrolled Agent (EA) or a CPA who specializes in taxes (not all of them do.)

Teup

Now the same parts will occur in multiple sets, and as a consequence they will have different cost values because the source is different. You'd need multiple entries in the database, that are somehow merged when porting to BrickOwl, or subordinate info fields per item that keep track of the different quantities per source (and, for example, always substract from the lowest first until it is depleted, remove the entry, and go on to the next).

That's totally unnecessary, just merge the cost values proportionally to the quantities being merged. You don't need a queue of multiple entries.

Yeah, that's true I know someone who does it the way I described, apparently there are some benefits to tracking what you've sold from which source, but I would also prefer a proportional merge like that.

Assuming you can keep up-to-date "My Cost" statistics, it becomes fairly easy to see what the remaining inventory is worth (as "your cost", not sale value). The sale prices will fluctuate constantly, but this should have no value on your inventory valuation. Your inventory is worth what you paid for it, and profits are generated only when stuff sells.

No need to over-complicate things .

Yes, assuming you have cost statistics in order, that is no problem, true. But if you don't (I don't) and you're going to calculate the stock value backwards from the sale value divided by the profit ratio, the unsteady prices make it a bit shaky because parting out set #2 is going to slightly modify the profit ratio of set #1 that you have parted out earlier. Otherwise it would've been a perfect calculation.

Teup

Stragus

Your inventory is worth what you paid for it, and profits are generated only when stuff sells.

@Stragus, thats not true im affraid.

Your inventory is worth what you need to pay the day of accountings made.

I buy a (for example) 10214 tower bridge in 2013 for 199.95 incl VAT
(i didnt sell it the entire year)
LEGO decided to lower the price in 2014 to 179.95, wich means my set is worth just that!

I'm not sure about that, that's not what the website of the belastingdienst says. They're talking about cost price, e.g. what you paid for it, not current commercial value..

http://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/belastingdienst/zakelijk/ondernemen/bedrijfskosten_en_investeren/investeren_en_inkopen/voorraden_houden/welke_bijzondere_regels_zijn_er_voor_waardering_van_de_voorraad

However, even if it be the way you said, for parting out it's fairly irrelevant - parting out is taking a "semi-finished product" and turning it into another product. In which case the current commercial value of the semi finished product is irrelevant, it's just about costs you make to obtain your resources. Well, LEGO also sells some loose parts so you could go and compare to PAB for the few items that they happen to have, but that all sounds a bit strange to me..

Either way, I guess we're good with just estimates (which is also what the belastingdienst keeps mentioning, you estimate your stock, not calculate it) and if you take a pessimistic estimate (ie. labeling it as high value) you will have to pay extra income taxes for that and they are certainly not going to mind that I would rather pay a bit extra once, than having to go through pointless unrealistic bookkeeping forever

bluedragon

Just one last quick comment - as can be seen from the differing opinions and the differing reports of what is required by various countries, it's a good idea to get tax advice from a qualified professional rather than random internet opinions. In the U.S., based on my work in a tax office for about five years at one point, I'd recommend talking to an Enrolled Agent (EA) or a CPA who specializes in taxes (not all of them do.)

that's what I did

Graham

Just one last quick comment - as can be seen from the differing opinions and the differing reports of what is required by various countries, it's a good idea to get tax advice from a qualified professional rather than random internet opinions. In the U.S., based on my work in a tax office for about five years at one point, I'd recommend talking to an Enrolled Agent (EA) or a CPA who specializes in taxes (not all of them do.)

that's what I did

That's what I did too - that's what led to my "cry for help" (

I attempted to "do" taxes one year using "software" (I had a TV/Film set building business and Wife works from home + a side business + rental property) after completing it showed that we owed a LOT. So back to a CPA we went and actually got a substantial refund…

I truly appreciate all this input, comments and suggestions, I hope y'all won't mind if I run this thread by the CPA that did last years tax return?

I also think I now see what's happened - I morphed from a hobby (now no more -pretty much) into a sort of business - I believe over the years I have accumulated a large stock of mostly undesirable parts.

Now i've hit a crunch of whilst having to take a portion of sales proceeds to pay bills loans etc. There is little left to buy more sets.

Then there's my other problem of I have a large number of sets purchased in the UK (tax paid) between 2010 and 2013, that came with me when we moved back to US. Most are OOP so the value is more than price paid - which I believe my best bet is to sell those either privately as in selling off a collection, worst case would be capital gains tax.

Then regroup later in the year when I then have funds to buy more sets.

Irrelevant rant ::- This has definately been a big learning experience, damn I hate taxes! In the US it is unconstitutional, and actually truely defined is "slavery" whereby you work, and are forced with threats to hand over 20-30% of profit - which means that for two-three months a year you work with no reward for your labor. /rant

Cheers G

DagsBricks

Talk to your tax pro. My understanding has been that unless you make more than US$1M annually, you can use the easier cash accounting method:

http://www.journalofaccountancy.com/issues/2002/apr/irseasescashaccountingrulesforsmallbusinesses.html