What to do if there is no receipt for the COST OF GOOD deducted?

[chromecaster]

Hey guys, new to business and new to this forum!

I sell collectibles, they gain value through the years. Recently, I decided to make it a business. So my inventory is a mixture of new goods and personal goods that were bought a long time ago. What do you do when you sell something that was purchased so long ago that you have no receipt for it? But you do recall how much it cost you.

Can you still deduct base on memory, or is this a case of in which I should not deduct? Say I sold for $600, and I bought for $300. I don't have the $300 receipt, but what if I can show advertisements for that piece that showed it was $300 when it was first in the market?

So basically, what I like to know is... are we proving "WE" bought it? Or, are we proving its value? Because like I said, through advertisements, internet links, I can prove what they cost a long time ago.

But if I have to prove that I actually bought it through receipts, then that'll be hard. Please advise, thank you for your time.

[vangogh]

Ideally you'd have a receipt for everything. Realistically…? If you deduct a bunch of things you don't have receipts for, the risk is one day the IRS audits you for the year you don't have all your receipts. If that audit never happens then no big deal. If it does your taxes get redone without those deductions and I assume some penalties. I won't tell you what to do. In general I think it's best being honest with the IRS, but the reality is not having a few receipts probably won't cause problems. If it's a lot of missing receipts on the other hand that's another story.

In the future, though I'd get better collecting receipts for everything. If the IRS comes calling you would need to show the receipt. Showing an ad for how much something cost won't mean much to them. Get in the habit of collecting receipts and if you don't have one for something, maybe you don't count it as a deduction. Do that a couple of times and it'll probably remind you to get the receipt.

[chromecaster]

Thanks for the tip!

I'm in CALI, and I have to do the 401 return for the sales tax that I collected. Under deductions, I'm not clear how to handles this versus the actual Income filing later in April. This 401 return for the Board of Equalization, do I just deduct each actual collectible I sold?

The COGS formula is used for the April income tax, right? Which is the aggregate of inventory at the beginning of the year, inventory bought during the year, and inventory at the end of the year. This formula is not used for the 401, is it?

[vangogh]

I was thinking this was all for income taxes. I should have considered the sales tax. To be honest, I'm not sure how sales tax works, especially in California. My business is service based so sales tax don't enter into the picture.

I found the 401 form online. It pointed me to this PDF about Sales and Use Taxes (http://www.boe.ca.gov/pdf/pub61.pdf). I haven't read the PDF, but I did search for the word deduction and it appears a number of times so maybe it can help.

[Evan]

Sales tax is based on your gross sales. So if you sold something for $600, it doesn't matter you bought it for $300 -- you're collecting and remitting taxes on the $600 unless it meets some exception.

I'd agree with vangogh's general advice. Receipt is the best, but having some back up documentation in lieu of it would generally suffice as acceptable (especially if you have a few prices, and go with the "higher" price or something in the middle). Having no documentation and pulling numbers out of a hat will not work.

[chrismarklee]

Call the state board of Equalization in California. They are very helpful for California Sales tax information.

[Freelancier]

Completing Your Tax Return - Board of Equalization (http://www.boe.ca.gov/sutax/faqreturn.htm)

There's a whole section on how to handle deductions. Basically, you report total sales and then you can back out certain sales that did not require you to collect a sales tax (like sales to out-of-state consumers who will not use the item back in California). One interesting section:


Cost of Tax-Paid Purchases Resold Prior to Use
You may have purchased tangible personal property and paid California sales tax reimbursement or use tax on the purchase. Generally, if you sell the property prior to using it, you can deduct the cost of the purchase on your return. For more information, please refer to Regulation 1701, Tax - Paid Purchases Resold.