Online sales question

[Possi]

My new client has an online business where he purchases junk, has it dolled up, and re-sells it for a profit. 

This is new for him (and for me)

He purchased $71k of items and his sales so far are $50k.

Is there a legitimate way for me to report the purchases if he does not keep inventory details? 

He is military disabled and I know, I just know he isn't keeping inventory lists. He buys, he fixes or pays for pros to fix, and he sells. 

I am afraid this will eventually turn into something I don't want. 

[Lee B]

Since, he is not conducting like a business then it's a hobby

[Possi]

3 minutes ago, cbslee said:

Since, he is not conducting like a business then it's a hobby

Oh no, it is quite the business. 

[RitaB]

16 minutes ago, cbslee said:

Since, he is not conducting like a business then it's a hobby

 

12 minutes ago, Possi said:

Oh no, it is quite the business. 

Yes, and that's the way you get him to straighten up.  The other thing you might try is making him tell you a fixed markup, and you back into what you need using sales.  Which is not possible if he's rehabbing, I realize.   So this guy sounds like a catch and release if he can't provide you with an ending inventory.

[Lee B]

You can give him some assistance with guesstimating a year end inventory.

If he doesn't follow through, what are you going to do,?

[Possi]

I have been on the phone with him. He buys and sells trading cards among other collectibles.

Trading cards are the main purchase/sales. He buys in bulk, breaks them up, pays professionals to value and grade the cards, and then sells them at a profit. 

There is no way he can give me a price on any individual item he sold. 

Should I just send him along? I would like to be able to do this tax return. 

[Lee B]

Interesting, I have a client who used to do the exact same thing as a side business.

He didn't seem to have any problem tracking everything and giving me a year end inventory.

[Possi]

HE'S ALL DONE IN MY OFFICE.

Just got a call back telling me that if we "need more income, I can give you at least $15k more because if I use Friends and Family on paypal, they don't report it to the IRS..." 

Click... buzzzz.....

access/denied

[Margaret CPA in OH]

I wonder how he knows that he spent $71k and how he knows what he sold to bring in $50k.  How does he advertise what he has to sell if he doesn't know what he had/has now?  How does he know whether or if it is worth the price he is asking for, say, a given trading card if he doesn't know what he paid for it?  If the hired professional appraised the cards, wouldn' the have that appraisal for each card he sold?  If not, how or why would he sell it?

So many questions...

[Margaret CPA in OH]

Hmmm, no wonder things didn't smell right. 

[RitaB]

17 minutes ago, Possi said:

HE'S ALL DONE IN MY OFFICE.

Just got a call back telling me that if we "need more income, I can give you at least $15k more because if I use Friends and Family on paypal, they don't report it to the IRS..." 

Click... buzzzz.....

access/denied

Hahahaha if they only knew what we've been thru.  

[Sara EA]

According to Pub 334, this guy doesn't need an inventory:

Inventories

Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use an accrual method for purchases and sales of merchandise.

Exception for small business taxpayers.

If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine your cost of goods sold in Part III of Schedule C.

Small business taxpayer.

You qualify as a small business taxpayer if you (a) have average annual gross receipts of $26 million or less for the 3 prior tax years, and (b) are not a tax shelter...

Treating inventory as non-incidental material or supplies.

If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid or incurred to acquire or produce the inventoriable items treated as non-incidental materials and supplies in the year in which they are first used or consumed in your operations. Inventory treated as non-incidental materials and supplies is used or consumed in your business in the year you provide the inventory to your customers.

So, you could have gone with the numbers he first gave you.  The offer to find more numbers, however, negated any possibility that you would want to work with him

[Lee B]

Actually, it's not that clear cut as this lengthy discussion in Forbes makes very clear:

 https://www.forbes.com/sites/peterjreilly/2020/08/15/irs-carves-back-tcja-inventory-relief/?sh=588a3f633bac

"Section 471 materials and supplies are used or consumed in the taxable year in which the taxpayer provides the items to its customer. Inventory treated as nonincidental materials and supplies under this paragraph (b)(4) is not eligible for the de minimis safe harbor election under §1.263(a)-1(f)(2)"

[Possi]

15 hours ago, Sara EA said:

According to Pub 334, this guy doesn't need an inventory:

Inventories

Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use an accrual method for purchases and sales of merchandise.

Exception for small business taxpayers.

If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine your cost of goods sold in Part III of Schedule C.

Small business taxpayer.

You qualify as a small business taxpayer if you (a) have average annual gross receipts of $26 million or less for the 3 prior tax years, and (b) are not a tax shelter...

Treating inventory as non-incidental material or supplies.

If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid or incurred to acquire or produce the inventoriable items treated as non-incidental materials and supplies in the year in which they are first used or consumed in your operations. Inventory treated as non-incidental materials and supplies is used or consumed in your business in the year you provide the inventory to your customers.

So, you could have gone with the numbers he first gave you.  The offer to find more numbers, however, negated any possibility that you would want to work with him

I've never held any of my small business accountable for inventory because of the limitation, knowing it's not necessary. HOWEVER, when I saw his purchases to sell were over $20k more than his sales, I DECIDED to ask him about inventory. I just had a bad feeling. Turns out, I was right.