Schedule C Treating Inventory as NIMS

[Jenna_PCUser]

I have a small business owner (gross receipts well under $25M per year) that sells physical goods. 

Their P&L reports COGS to me and they file taxes on a cash basis. 

I understand there is a way for them to report COGS as non-incidental materials and supplies (NIMS). 

My question is: how should I be entering this into Proconnect? 

Option 1: Enter the COGS as an expense on the supplies line 22 of schedule C

Option 2: Enter the COGS as materials and supplies on line 38 in part III of schedule C

Are there other reporting requirements for this taxpayer that I need to be aware of, such as lines 35 or 41 in part III of schedule C or filing? 

This is the first tax year of them having these expenses. 

Thank you for your help!  

[TaxGuyBill]

Non-Incidental Materials and Supplies are deducted when used, not purchased.  It seems like pretty much the same timing as keeping Inventory, so is there a reason why they are using NIMS as opposed to Inventory?

But there is a third option, *IF* they qualify for it.  The simple version is that if they DON'T keep Inventory for other purposes and their Accounting Procedures deduct it for their 'books', then it can also be a tax deduction.  See Regulation §1.471-1(b)(6).

https://www.irs.gov/publications/p538#en_US_202112_publink1000270704

https://www.law.cornell.edu/cfr/text/26/1.471-1

[Jenna_PCUser]

Hi Bill. Great point, I was conflating NIMS with their additional options of AFS or non-AFS methods. In reading the materials you've linked, it looks like they have those three options. 

Their P&L does have a COGS section, but it sounds like I need to see the balance sheet and talk more with the client about if they are keeping an inventory before we make a decision. 

It sounds like the simplest way to do this is to 1) not keep an inventory and 2) expense the supplies the same way I'm seeing it on their P&L for the year.

I have not found clarity on where that expense specifically goes on schedule C (Part II on supplies line or Part III as part of COGS), and indeed in other online discussions it seems like it's up to the taxpayer, so long as they stay consistent year to year. 

Does that mesh with your own understanding and experience?

Thanks for your thoughts.

[sjrcpa]

Keeping inventory records also includes those records that may not be on the financial statements.

[TaxGuyBill]

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@Jenna_PCUser wrote:

I have not found clarity on where that expense specifically goes on schedule C (Part II on supplies line or Part III as part of COGS), and indeed in other online discussions it seems like it's up to the taxpayer, so long as they stay consistent year to year. 

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I agree, I don't think it really matters, as long as it is consistent.

I know many accountants cringe at this, but I don't use the COGS section of Schedule C if they don't have inventory.  To me, that section seems clearly set up for Inventory, so without inventory I usually just put the expenses under Supplies on page 1.  But as I said, that is only what I do, and I know many accountants cringe at that.