FAQs - Manufacturing and Distribution

An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales.

To figure taxable income, you must value your inventory at the beginning and end of each tax year. To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items.

The rules for valuing inventory cannot be the same for all kinds of businesses. The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Your inventory practices must be consistent from year to year.

The value of your inventory is a major factor in figuring your taxable income. The method you use to value the inventory is very important. Generally there are two methods for valuing inventory. These methods are cost or lower of cost or market.

Source: IRS.gov

Include the following items when accounting for your inventory.

1. Merchandise or stock in trade
2. Raw materials
3. Work in process
4. Finished products
5. Supplies that physically become a part of the item intended for sale

Containers such as kegs, bottles, and cases, regardless of whether they are on hand or returnable, should be included in inventory if title has not passed to the buyer of the contents. If title has passed to the buyer, exclude the containers from inventory.

Source: IRS.gov

The expenditures of research and development (R&D) are generally capital expenses. However, you can choose to deduct these expenditures as current business expenses.

You may use one of the two following methods of accounting for R&D expenditures:

1. You may deduct your R&D expenditures in the tax year, in which you paid or incurred, or
2. You may amortize such expenditures over a period of not less than 60 months

You must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer and amortize.

You may claim the R&D credit against tax for certain qualified R&D expenditures and combine the credit as one of the components of the general business credit. The R&D credit is a nonrefundable tax credit.

Source: IRS.gov

Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.

Including Taxable Benefits in Pay

You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts:

• Any amount the law excludes from pay
• Any amount the recipient paid for the benefit

Source: IRS.gov