Bakery Factory

[Taxizen]

This is new to me. The new client runs a bakery factory. How do you report the cost of goods sold(COGS)? The previous CPA only included materials purchased in COGS. Do I have to apply cost accounting to COGS? What else do I have to consider the tax reporting?

Any input would greatly appreciated.

Thanks.

[TaxCPANY]

dude,

you have a couple, implicit but crucial questions need outing.

1) by "cost accounting" are you referring to "accrual" basis accounting?

2) are you asking about irc sec. 263A?

The latter concern's the easier one. If your client grosses $10 million annually, or has averaged that over the past three years, then the prior cpa's treatment is inadequate.

the former question's harder, cuz it usually serves an inventory-based business best to reckon its returns (& financials) on the accrual basis. but the irs allows "small biz" to use the cash basis -- and not too few lenders accepted *compiled" financials that way too -- as long as the numbers on those weren't distant from the tax returns'.

the prior cpa might have made a pragmatic decision to forego rigorous cost-accounting, to save the client a lot of hassle and cost -- and it's quite possible the client wasn't dis-served, especially if there aren't notices piled-up from prior returns, and the client has a clue how well or ill his operation is faring.

hope this helps, taxcpany

[Taxizen]

dude,

you have a couple, implicit but crucial questions need outing.

1) by "cost accounting" are you referring to "accrual" basis accounting?

2) are you asking about irc sec. 263A?

The latter concern's the easier one. If your client grosses $10 million annually, or has averaged that over the past three years, then the prior cpa's treatment is inadequate.

the former question's harder, cuz it usually serves an inventory-based business best to reckon its returns (& financials) on the accrual basis. but the irs allows "small biz" to use the cash basis -- and not too few lenders accepted *compiled" financials that way too -- as long as the numbers on those weren't distant from the tax returns'.

the prior cpa might have made a pragmatic decision to forego rigorous cost-accounting, to save the client a lot of hassle and cost -- and it's quite possible the client wasn't dis-served, especially if there aren't notices piled-up from prior returns, and the client has a clue how well or ill his operation is faring.

hope this helps, taxcpany

Thank you for your exploration. The company doesn't have to apply sec 263A to COGS since the indirect cost was less than $200,000. However, the previous CPA didn't account for depreciation, labor, rent, utilities, etc in COGS. He reported them on the operating expenses. Is it ok to report like that on the tax return?

[GLJEANNE]

Thank you for your exploration. The company doesn't have to apply sec 263A to COGS since the indirect cost was less than $200,000. However, the previous CPA didn't account for depreciation, labor, rent, utilities, etc in COGS. He reported them on the operating expenses. Is it ok to report like that on the tax return?

Yes, that's how it's usually done - COGS would be the food, maybe some supplies. The rest is operating. And cash method should eb used for the return, but not for the books. If he's keeping his books on teh cash method, he's missing a clear picture of how he's doing.

Jeanne

(a 20 year vetran of the restuarant biz)