If your business carries inventory the value of this at the end of the year will have an impact on how much tax you will pay.
In general inventory is an asset until it is sold and an expense when it is sold. So if you buy $50,000 of inventory on the last day of the financial year and it is not sold on that day that purchase would not reduce your taxable profit or your tax bill and you will have $50,000 wrapped in product and coming out of the bank. Sales forecasts & Inventory control should drive the timing of inventory purchases. The Just in time method of ordering helps cash flow and reduces costs of storage and obsolescence.
If you are looking to reduce your taxable profit by paying for items prior to the end of the financial year #TAXtip # 3 Prepayments next week will identify what items you could consider and up to what amount is allowable as a deduction in the current tax year.
With Inventory the year end adjustment is based on the value of the inventory you have and this value is the “lower” of what you paid for it or its market value. It is important to get the value right because if you are “over valuing” the inventory it will increase your taxable profit and your tax bill and if you are under valuing inventory you could be short paying your tax liability which carries the risk of IRD penalties. Working out what the inventory cost you there are a few different methods eg Weighted average cost (WAC) of the units on hand or the first in first out principle (FIFO). If you are manufacturing items you will have raw materials , Work in progress (WIP) and finished goods. The work in progress and the finished goods value will include the raw material costs and the manufacturing costs apportioned to them.
Review the inventory you have on hand prior to the end of the financial year and rid yourself of any obsolete inventory, promote and move surplus slow moving inventory and at the end of the financial year complete a detailed stock take identifying items worth less than what you paid for them so their value can be written down reducing the taxable profit and your tax bill.
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