Question

You work for a firm that operates a small tax business. The firm has a few clients who have asked some tax planning questions that require a little research on the part of you and your colleagues.

Client 1:
Ned operates an airplane repair business as a sole proprietorship and uses the cash method. Besides providing repair services, Ned also sells parts and supplies to owners and other repair businesses. The sales of parts and supplies constitute less than $15,000 per year. This is such a small portion of Ned’s income that he does not keep physical inventories for the parts and supplies.

When must Ned start keeping account for the sales and purchases of supplies on the accrual method? At what level of income received must Ned start keeping a physical inventory of the parts and supplies?

Answer 1

1. In accrual method of Accounting revenue or expenses are recorded when a transaction occur rather than when payment is received or made. So if the method of accounting opted is accrual, Ned shall account the sales and purchase of supplies at the time when the transaction occurs .
2. In the case of sole proprietorship, to be exempt from reporting inventory, an individual taxpayer must not annually earn more than $1 million, as determined by annual gross receipts for the past three years.

In the given scenario, Ned earns less than$15,000 per year from sale of supplies. If the annual earnings of Ned exceeds $1 million in a year, he should start keeping physical inventory of the parts and supplies.