I am starting an online t-shirt sales business. I create my own designs and then purchase pre-screened heat transfers, which are printed, as needed, onto blank tees (I keep a small inventory of tees on hand). Do I need to track inventory? Probably yes. What's a good accounting app to use? It would seem I need to track two types of inventory: the raw materials (blank tees and heat transfers), and the final product. But that sounds complicated.
I thought about keeping the transfers and raw materials separate, but I don't want to produce invoices which show two line items (one for the shirt and one for the design).
Thanks in advance for your suggestions.
Answers
Expert
Anonymous, you can use the same accounting method for the state you live in as for the feds. So, yes, the same applies to state taxes. Best wishes on your enterprise!
Expert
To track your Cost of Goods Sold you need a program that can handle inventory. LessAccounting is a terrific program but doesn't have that capability. Try Kashoo at less than half the monthly cost.
Chris H.
Logan,
Thanks for the answer. Does the same apply to (CA) state income taxes? If there's no requirement to track inventory for federal or state, then I will save myself the headache and use LessAccounting :)
Expert
Hello!
For federal tax purposes, you are NOT required to track inventory unless your annual sales are over $1 million. If you don't make $1 million per year, you simply keep track of what raw materials you buy during each calendar year. You will subtract the raw materials costs and the rest of your expenses from your sales in order to determine your net income.
I recommend using an online accounting program. Several of them offer free accounts for very small businesses. Freshbooks, LessAccounting, and Xero are some suggestions. Each of these offers the ability to make and send invoices. You can set up the invoices in these programs the way you want, with just one line item for a t-shirt.
Even though you are probably not required to track inventory for tax purposes, as your business progresses, you might want to track your Cost of Goods Sold (COGS). This is the amount you spent on raw materials for the t-shirts that you already sold. You can subtract COGS from your sales to find out your profit margin on the t-shirts. Doing this calculation periodically will help you fine tune your prices as you go along, or bring your attention to excessive materials costs.
Good luck, and let me know if you have any follow-up questions!
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Anonymous,
Sorry to dissapoint you, but according to Sec. 1.471-1 "In order to reflect taxable income correctly, inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor." Which in your case it is very much so. So, yes you will have to keep track of inventories and report tham as such.
Let me know if you have any questions.
Thanks.
Felix.
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