Tax Time: Have You Accounted for All Inventory and Reportable Income?

End of the year is nearly upon us and that means closing the books on another year of business and preparing to file your federal and state business income taxes. Are you ready?

Whether you have had a banner year or just a so-so year, now is the time to get rid of those items that are setting around in your balance sheet and have not been addressed this year.

For example, throughout last year you showed a great profit margin in your store sales only to realize after you closed the books at year end and filed your tax return that the inventory that applied to those sales had not been taken out of your inventory account and charged off to cost of sales at the time the merchandise was sold. Now, you are faced with recognizing the write off of inventory this year on your tax return. What is the monetary impact of this mistake?

Inventory Reporting

First, you over stated the prior year’s profit by the amount of merchandise that should have been taken out of your inventory and charged to cost of sales. This year’s profit will be less by the cost of the inventory you did not recognize last year. Your first instinct may be since you did not recognize this cost last year, it will even itself out over the two years if you recognize it this year. That is only true, if that change in reportable income between years did not change your tax brackets, and it is not the tax implication that is the only issue. The bigger question is how effectively are you managing your business?

If you do not match your cost with your sales or operating expenses with the period they apply, it is impossible to make good business decisions. Typically, when a mistake like the one mentioned above is made, it may have a negative impact financially for maybe one or two years. However, if you do not address the underlying issue of whether or not you are selling your store merchandise at the right retail price or whether you should be selling it at all, you cannot be competitive while being profitable. You have not addressed the real issue.

Balance Sheet

Throughout the course of a year, I have the opportunity to review a number of marina’s financial statements primarily with regards to the sale of a property. I will say that probably ninety percent of the time, I am handed a computerized copy of an income statement and never a balance sheet. If I ask for a balance sheet, it is usually the abbreviated form that is on the federal income tax form, typically prepared by your tax accountant and which is useless for analyzing a business.

Maintaining an accurate set of records, including a balance sheet and an income statement will ensure you have the foundation to make sound business decisions on an ongoing basis and to make the necessary changes to maintain maximum profitability. It has been my experience when refinancing or selling your marina, inaccurate financial record keeping will negatively impact the value of your business and may also have unintended tax consequences.

Dennis P. Kissman is president of Marina Management Services Inc. in Boca Raton, Florida. He can be reached by phone at 561/338-5800 or via email: dennis@marinamanagement.com.