Accounting for Liquor Store Inventory on Your Taxes as a Cost of Goods Sold (COGS)
At the end of the tax year, liquor stores and other retail businesses have the option of deducting inventory costs from taxable revenue as the Cost of Goods Sold (COGS). When performing a COGS analysis, you are essentially deducting inventory expenses from previously made sales all at once. This approach may differ if the liquor store is accounting on a cash basis, where it might deduct the cost of inventory expenses at the time the inventory purchase order is paid for. These deductions coupled with other common deductions, like interest paid on liquor store loans, can help liquor store owners reduce their tax burden while also maximizing every penny they invest in their business. Learn more about how inventory is deducted as COGS and how inventory affects package store taxes by reading on.
How to Calculate Liquor Store Inventory as Cost of Goods Sold (COGS)
Many liquor stores operate on an accrual accounting basis, which means that expenses and revenues are accounted for at the time of an actual transaction. For inventory, this method of calculating profits and losses means that the cost of the inventory item sold is deducted at the moment a transaction occurs. “Really, that makes sense if you think about it,” explains CPA Micah Fraim. “Inventory is an asset and shouldn’t be expensed until used.” Rather than account for each individual inventory COGS as a line item, many business owners choose to account for COGS all at once. To do this, they make the following calculations:
- Take total inventory remaining at the end of the last tax year, and then add on the value of all inventory purchases made throughout the current tax year
- Subtract remaining inventory at the end of the current tax year from the above sum
- Multiply each inventory item remaining by its cost to the business; since liquor stores have highly variable costs per SKU, each calculation must be made for respective SKUs
Under this calculation, the business will still not be able to deduct the difference in their beginning and ending inventory value. In other words, they cannot deduct the value of some inventory currently held as COGS since sales are the ultimate barometer, not inventory purchases. As an example, consider a business that starts the year with $40k in inventory, spends $600k in inventory throughout the year, and finishes the year with $80k inventory in stock. Using the COGS calculation, the business can deduct $560,000, leaving a $40k difference in expenses that the business cannot deduct that year. For this reason, liquor store owners may want to be cautious about over-ordering at the end of the year since they cannot deduct the purchase expenses until the goods are sold in the following year.
Reducing Your Tax Burden with Business Renovation Expenses and Liquor Store Loans
The good news for liquor store owners is that they can find other ways to invest in their business while reporting the investments as a business expense. For instance, if you owned a liquor store location and made “qualified retail improvements” to the building intended to enhance the customer experience, then these costs can be depreciated over an accelerated 15-year cycle as opposed to the typical, quite lengthy, 39-year depreciation period. Furthermore, all interest paid on a liquor store loan can be deducted as well. Interested in learning more about your options for renovating or improving your business with liquor store financing products? ARF Financial can help you secure the exact loans and financial products you need to make your business more successful. Click here to apply for a free, no-obligation quote. You can receive your quote for available financing in as little as 48 hours and have your funds released in just 3-5 business days, so get started now!