hey it's patti scharf CPA and co-founder of catching clouds the leader in
e-commerce accounting and today we're going to talk about a podcast episode
from the amazing seller it was posted on November 7th and it was called huge tax
news for Amazon sellers game-changer which of course is very exciting
everybody wants to know about game-changing tax legislation and
somebody brought it to my attention and they were like is this really legit like
because if this is true this is this really is a game changer so I thought I
would break it down for everybody in this video make sure you stick around to
the end there are some interesting things I found along the way that I
think you will find interesting too all right so let's get started all right so
I want to give you a little bit of background if you want more details and
background go check out the video I did this summer called do the 2018 tax law
changes effect when you can deduct inventory that that's what this whole
thing is about but when I did the video I kind of did it based on gut feel and
not too much research or anything like that I didn't like pull out my tax books
and dig through and stuff I just did it based on what I knew about stuff at the
time so when I heard this podcast and basically what they were saying was you
can now deduct all of the money that you spend on inventory so if you're buying
inventory you don't have to classify it as inventory you can write it off
immediately you don't have to match it against the income that you receive like
it's instead of being inventory goes straight to cost of goods sold alright
so so I did that video basically my argument was no no that's not right
and so because I am NOT a tax expert I wanted to double-check myself and make
sure that the advice I was giving was accurate and that I actually knew all
the facts and stuff so I went on a little journey to figure out everything
I could about this tax law and how it would impact Amazon sellers so here's
the actual issue before this tax law change if you had more than five million
dollars in gross receipts you were required to file as an accrual-based
taxpayer if you had an inventory business so you're selling retail you're
selling widgets and things like that it was a million dollars so a lot of people
who maybe wanted to file as cash basis taxpayer weren't allowed to because
their sales were too high okay so they raised that threshold up to twenty five
million dollars that's like average gross gross receipts over the last three
years okay so much like tons more people are able to file as cash basis taxpayers
now the question is what does this mean for you
like why do you even care about filing as cash basis versus accrual basis the
deal with cash basis is you you report your income when you receive it and you
report your expenses when you pay them so a lot of people think that if you're
spending a lot of money on inventory you're laid out that cash those are
expenses you get to write that all off as a cash basis taxpayer that's not
exactly true because costs for inventory or what's called capitalized costs which
means it's not an expense it's an asset it's something that you own some it's
something of value that you own and you get to just kind of expense that a
little bit over time as you sell the inventory okay okay so here is the meat
of the issue if you switch to cash basis can you now deduct all of your costs for
inventory as cost of goods sold when you pay for it okay that that is the
question so let's get back to the podcast this was a hundred percent what
they were saying is that now because of new rules and things
like that the IRS had provided guidance that said yes you can absolutely write
off all of your inventory when you buy it as a cash basis taxpayer as I
mentioned before in my gut not really sure that's right but I am not the queen
of all things tax so I just started diving in and seeing what I could figure
out about it okay I went to some of my community boards
asked some CPAs hey you know what's your opinion and I did this also in the
summer and I both times I got like these kind of like non-committal responses or
yes you can definitely write it off and also yes you absolutely cannot write it
off so I'm like okay thanks for clearing that up for me and while I was kind of
waiting for a response I was continue to do more research and I
was looking for articles and things like that
and one of the things that was really glaring to me was that there was like
like the silence on this topic from like Journal of accountancy or CPA practice
advisor or any of the like main trade mags like that nobody talked about it so
I'm like there's I I don't think that like if this was as huge of a deal if
this was a game-changer then there would be a lot of talk about
it and there's just not and I continue to have conversations on e-commerce fuel
if you don't know about e-commerce fuel and you're an online seller like seven
figures and up man you got to go check them out because they have the best
conversations in their community form that those people are like badass I I
have to tell you because I I started just having this out loud conversation
with them online and I got way deeper into what the issues were than any of
the conversations I tried to have with my CPA friends and here are a couple of
things that we kind of fleshed out in this process
oh and hat tip Therese who found this amazing letter from eivin's Phillips and
Barker that kind of broke everything down and was really intelligent and
approach to everything in a really smart way I
we'll give you a link to that letter down below because it's it's just
awesome and you'll want to share it with your CPAs alright so here is my journey
weeding through all of this tax jargony stuff I'm gonna try and and interpret it
for you alright so I took a look at IRS revenue procedure 18-49 dove break it
down a little bit alright so the section that everybody really cares about is 319
and in this what it says is okay you don't have to treat it like inventory
you don't have to like do all these other funky calculations like uniform
capitalization rules and blah blah blah blah blah that's actually in an earlier
section so you don't have to treat it like inventory you have two other
options the first option is to treat it as non incidental materials and supplies
and the second option is to treat it according to the taxpayers
method of accounting alright so let me start with the first one non incidental
materials and supplies basically it's kind of the flipside of incidental
materials and supplies incidental means it's incidental to everything it's kind
of immaterial just expense it immediately okay so that's what like
everybody who's who says that you can write stuff off right away if it was
incidental materials and supplies I'd be on board with you but it's not it's it's
non incidental materials and supplies so it says yeah this is kind of it's kind
of a big deal in your business and so you don't have
to like capitalize it but you can only write it off at the later date of when
you pay for it or when it's used or consumed so that's pretty much exactly
what everybody was doing beforehand like you would hold on to it and then as you
sold the product you would expense it and I'm going to talk more about that
and maybe some loopholes and stuff in just a couple minutes so hang around for
that the second option was to use the taxpayers method of accounting and first
they talk about having applicable financial statements that's actually
there like some legal jargon and it's kind of the equivalent
of having audited financial statements or filing some reports with the SEC and
stuff like that like that's not gonna work for anybody and it doesn't matter
because the vast majority of small business small businesses don't even
have that anyway so it doesn't matter but it does say or if you don't have
applicable financial statements then just use whatever method is cool you
know whatever method you're using with your accounting system yeah just use
that like if you whatever you use for financial purposes that's legit to use
wit for tax purposes so here's where the hair on the back of my neck starts
standing on end because literally what it's saying in there is it doesn't
matter what you do you can have like the crappiest records in the world and
that's okay as long as your crappy records are consistent between tax and
book that's fine so I think this is where everybody is really jumping on
board and saying hey if I don't keep track of inventory for book purposes
then I can write it all off immediately now I'm pretty confident that the IRS
did not intend to have everybody just writing everything off but that doesn't
mean that the language is not completely ambiguous and that there's not a lot of
room for interpretation so I'm gonna give you more of my opinion a little bit
later on but I would just say this is what I think has everybody kind of in a
flurry all right so we came up with one potential loophole and this was
basically what they're saying is okay it's not inventory it is non incidental
materials and supplies so because it's not inventory it doesn't have to wait
until - it doesn't have to wait to be written off until the products are sold
it just needs to be used or consumed so what is used or consumed mean does it
mean that when raw materials are used up and turn into finished goods that it can
be used it can be written off at the time that turns into finished goods
doesn't mean that when you send your products to Amazon and they slap a label
on it to finish the product to turn that into finished goods is is it okay does
it be is it considered used and consumed at that point I don't know these are
questions that people are raising I think that there is not sufficient
guidance yet out from the IRS to make a distinction one way or the other I think
if you're going to make an assertion on one of these you want to have some
pretty strong evidence support and argument for taking that position but I
also don't think that it's absolutely black and white one way or the other
loophole number two is related to what's called a de minimis election so maybe
you've you know about this when you're talking about fixed assets so let's say
you buy a computer and it's three thousand dollars because it's a really
really nice computer okay you can't just expense that it's not an expense
it's another capitalized asset so that becomes an asset and you get to take a
little bit of expense every year until the entire cost of that asset has been
depleted that's called depreciation okay that's what that is so but people who
have like a de minimis threshold basically on fixed assets if you if you
have an at and at what would otherwise be an asset basically the IRS is like
yeah you know that's small enough like don't worry your pretty little head
about it just write it off okay inventory doesn't have a de minimis
election but non-incidental materials and supplies does and that that limit is
$500 so I know a lot lot lot in fact probably the vast majority of e-commerce
sellers are not selling things that are more than 4 or more than $500 so you
could conceivably expense all of your stuff
under that de minimis election but again it's one of these situations where if
all of your products are let's say 50 bucks and you're a 5 million dollar
company well that 50 bucks becomes a material
part of your business even though it's a small dollar amount
so I would feel very uncomfortable taking that position doesn't mean that
there's not a gray area alright so let me give you a few things to keep in mind
before I get to my final thoughts and conclusions the first thing is if you
are an accrual based business you have to elect to make the change to cash
basis the IRS is expecting you to continue filing accrual basis
forevermore you have to request that change now there's an automatic
acceptance of the change that's part of this law so you can go ahead and just
request it and you'll be granted it if you ever decide to change back to
accrual basis again you'll have to like ask the IRS for permission to make a
change the way you make a change is by filling out form 3115 you can either
file it before the beginning of the tax year which would have been December 31st
of 2017 so it's too late or you can file it with your tax return just tell your
CPA you should be discussing this with them anyway they should know what to do
but that would need to get filed with your tax return all right
the second thing to be aware of is that you cannot be flipping back and forth
between cash and accrual based on whatever happened that year you just you
have to pick a method and go with it unless there are some extraordinary
reasons why you might want to switch from one to the other okay so don't be
thinking that you can just change your mind every year it doesn't work that way
and again you have to ask permission from the IRS and if you don't have a
good reason they may not allow you to do that the third issue and I think this is
the most important issue is that keep in mind that your costs per product are a
seesaw so like you buy it and you have more inventory and you have no cost of
goods sold or you expense it and then you have some
and some cost of goods sold or you expense all of it and you all your
amounts are here and then you've got no inventory leftover okay so what's going
to happen is if you take a full deduction this year that means next year
when you have income you're not gonna have any more deductions to take against
that unless you buy more inventory so you can control your expenses more by by
picking and choosing when you're gonna have this outlay of cash and how you're
gonna time that you have more control as a cash basis taxpayer but at some point
you're gonna have to pay the piper you know unless your business just blows up
with which nobody wants to have happen so just keep that in mind if your
inventory is growing year over year it may be a good deal if it's shrinking it
may be a bad deal so just kind of keep that in mind when you're deciding what
to do alright so my last comment about this whole thing my personal opinion is
I think that yes there may be some gray area I certainly do not think that this
is a game changer that everybody can suddenly deduct all their inventory I
don't think it's that black and white I think it's a little nerve nerve wracking
to think that like all of my clients might be taking that advice and leaping
over and starting to deduct all their inventory I just I it's it's it's a
little scary for me especially because in the revenue procedure itself it
basically says something to the effect of okay well if you change your
accounting method just be aware that it doesn't mean that we can't audit you and
if we do audit you that you have to support your position and we may or may
not agree with you so if you change change at your own risk so that right
there kind of stresses me out for everybody so with all that said I'm not
going to tell you what to do you need to go talk to your CPA please please please
talk to a CPA before you make any kind of sweeping changes and things like that
make sure that they understand the issue you understand the issue and you know
all the risks involved before you go into it all right I am not the one
signing your tax return the only tax return I'm signing
my own so I wish you the best of luck I hope this helped if you like this video
please like comment and share if you haven't already please subscribe and
I'll catch you later