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The cumulative cost of selling a particular product is called Cost of Goods Sold (COGS). It varies from product to product and increases with factors such as complexity of the manufacturing process or the cost of raw material. The volume of the product manufactured can also have a direct impact on the overall Cost of Goods Sold.

It is an important figure because you will need it when filing your tax returns. Adding it to the equation will reduce your total income, hence giving you a certain advantage. Unfortunately, calculating this cost of goods sold is not as simple as it sounds. Getting it right is crucial to getting your taxes right.

How Can You Calculate the Cost of Goods Sold?  

Quite naturally, the calculation of the Cost of Goods Sold varies from product to product. There are many factors to consider. It is in the best interest of your business to work with a CPA or a tax professional in order to accurately calculate the cost of your business income tax returns.

The first thing you need is the beginning amount and the inventory amount plus the cost of all the inventory purchased that year. There are different evaluation methods. You should talk to your CPA to know which one they will be using. This will give you a better idea of components you need for the actual calculation.

What Are the Essential Components for the Calculation of the Cost of Goods Sold

The first step is to identify and analyze the following components.

  • Cost of inventory at the beginning of the year
  • Cost of inventory purchased during the year
  • Inventory left at the end of the year

The sum of the first two components minus the last component will get you the Cost of Goods. It doesn’t matter if you are a manufacturer or re-seller, this calculation will help you deduce both the direct and indirect cost of goods sold.

Direct and Indirect Costs – In the next step, direct costs and indirect costs are calculated.

The direct costs include the cost of raw material, cost of merchandise, packaging costs, cost of supplies for production, and direct overhead costs involved in the production.

The indirect costs include labor cost, storage cost, salaries, equipment cost, as well as the cost of depreciation. Facilities costs include mortgage, rent, utilities, etc. This is perhaps the most complicated part of the entire process. It is quite impossible for any business to determine these costs without the help of a CPA.

The LIFO and FIFO Methods

LIFO and FIFO are ways to calculate the inventory that is left at the end of the year. The IRS is very critical of the valuation method you use. In case you decide to use a different valuation method than the previous year, you will need to seek approval from the IRS.

Different COGS calculation forms are used for different types of businesses. For instance, sole proprietors use Part III for calculation and include the cost in income section part I. Corporations or partnerships use the Form 1125A. This may be a complicated process and best left to professional CPAs.

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About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

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The IRS issued regulations, both temporary and final, on the 18th of July 2017, updating the due dates and rules that define extensions (such as the time to file tax returns). The regulations apply on returns that are filed on and beyond the 20th of July 2017. Much of the statutory changes were in effect from the 31st of December 2017. Such changes supersede the final regulations.

In 2015, Congress passed many bills that incurred statutory changes and those changes are summarized within these final regulations. The bills did contain provisions affecting certain things that aren’t related to or affected by the main bill. The two bills that did so were “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” and “Protecting the Americans from Tax Hikes Act of 2015”.

If there is a case when a filing due date (for regular taxes) falls on a non-business day (such as a Sunday, Saturday or a Public Holiday) the due date is postponed to the next business day. 2016 saw an adjustment in many of the due dates for filing because of this rule. These dates include:

  1. Individual and FBAR Due Date
  2. Form 1041 Due Date
  3. Partnership Extended Due Date
  4. Form 1041 Extended Due Date
  5. C Corporation Due Date

Tax Returns for 2017 that are to be Reported in 2018

W-2 Forms, submitted either electronically or by mail, are due by January 31st.

Partnership businesses are supposed to fill out Form 1065 and S Corporations are supposed to submit Form 1120S. Both of these are due on the 15th of March. The deadlines for these can be extended up until September 17th.

Trusts and estates must submit Form 1041. And, Form 1120, which has to be submitted by C Corporations, must be submitted by the 17th of April. These can be extended up until the 1st of October and the 15th of October, respectively.

Tax exempt organizations are due to submit the Form 990 Series by the 15th of May. The extended due date for this form is the 15th of November.

The Form 5500 Series, which is supposed to be submitted for the Employee Benefit Plan, is due on the 31st of July, with the extended due date being November 15th.

For the corporations and businesses that file according to Fiscal Years, the following is accurate.

 Filer Type

Due Date (Counted after End of Fiscal or Plan Year)

S Corporations and Partnerships

The Fifteenth Day Of the Third Month

C Corporations

The Fifteenth Day of the Fourth Month

Employee Benefit Plan

Last Day Of The Seven Month

It is important to check the due dates for tax returns in the states that are relevant to you because, sometimes, the due date set by individual states may differ from the federal due dates for filing.

Changes That You Should Be Aware Of

1. Form 1065 Filers (Partnerships) are getting a longer extension period, which can be up to 6 months. Previously, they were able to have a 5 month extension.

2. Form 1041 Filers (Trusts and Estates) have a maximum extension of 5 ½ months, granting them a two week longer limit of extensions compared to the limit for previous rules.

3. The Report regarding Employee Benefit Plans will be getting an automatic extension to a maximum of 3 ½ months.

4. Reporting of Data on Financial and Foreign Bank Accounts will have the same due date as Individual Form 1040, with an extension of up to 6 months. The convenience provided by this change is the alignment of the Individual and FBAR filing. Moreover, the penalty for failure to file a request for an extension in time can be waived by the IRS.

5. The automatic extension for those who are filing the 990 Series (i.e. Tax Exempt Organizations) will be getting a longer extension, which will be 6 months rather than the former 3 month automatic extension.

Check out America's Best Bookkeepers

About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.