4684 Theft Loss on Schedule C

[yourtaxesRready]

My Client has a Documented Loss of $60K (inventory) from his Schedule C Business. The Net Schedule C Income PRIOR to the Theft Loss is approximately $68,000. Why does he have to pay Self Employment Tax on Pre-Theft Schedule C Income?  Thanks 

[abctax55]

How/where did you enter this "inventory" theft loss?

[yourtaxesRready]

On the Form 4684 which converted to Schedule 1 (1040) Income Loss  of $60K --- Reducing 1040 Income Tax to approx $8,800.     However there is no reduction of the Schedule C Net Income of approx $68K taxing it as fully taxable SE Tax with no theft reductions.  Help!

[abctax55]

IF you believe this theft loss of inventory is a Sch C deduction, then you need to enter it Sch C deductions are entered for ProSeries.

You have to research whether that's the correct presentation based on the facts.

I don't believe any software ( I'm a Lacertian)  can cross-reference Form 4684 to offset SE tax.

[BobKamman]

Doesn't the lower ending inventory result in a higher cost of goods sold, so that the theft loss is already shown in the gross and net income?

[judys3]

The 4684 does not tie back to the schedule C to lower self employment taxes.  If you reduce the inventory the COGS would increase resulting in a lower taxable income on the Sch C

[abctax55]

Bob... if it's 'shoplifting' losses that's correct.

But my mindreading skills (?) think this is something different.  NMI

[BobKamman]

How else do you lose inventory?  OK, in addition to shoplifting, there's employee theft.  Since this is described as a "Documented" loss, maybe someone signed a confession.  Or there's video of the goods walking out of the store.  

I don't have any retail, bricks-and-mortar clients.  All I know is that the lower the ending inventory, the higher the cost of goods and the lower the gross income.  Is this a trick question?  Tell me what I'm missing.  

[IRonMaN]

More details would be nice.  It would be a little bigger production to have $68,000 of 2x4s stolen than to have $68,000 of iPhones walk off.

[yourtaxesRready]

Thank you judy3 --- I guess I am wondering if taking the Theft Deduction off Inventory (COS) is appropriate.  It seems correct to me BUT I cannot verify.  The software takes the loss off personal income on Schedule 1. (1040) ... Any more thoughts?   Thank you again for sharing.  Rita Lavelle

[qbteachmt]

The software does what you tell it to do.

Have you read Pub 547?

https://www.irs.gov/pub/irs-pdf/p547.pdf

"Loss of inventory. There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Don’t claim this loss again as a casualty or theft loss. If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income.

The other way is to deduct the loss separately. If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. Reduce the loss by the reimbursement you received. Don’t include the reimbursement in gross income. If you don’t receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery."

You might be considering this is business property instead of salable goods. I don't see where you ever addressed what was this inventory. Cars? Jewelry? Clothes? Jet skis?

[Camp1040]

@IRonMaN  How long do you want the 2X4's?

[IRonMaN]

I guess for as long as they will last.

Hold on a second - or were you asking if I was looking for eight footers?

[PATAX]

Years ago had client that wanted to know if there was a deduction for obsolete inventory discarded that could no longer be sold. I told him when he counts the ending inventory then the cost of goods sold will reflect this. This was one of the reasons that many businessmen, especially immigrants, opened up businesses with durable goods that did not spoil or become obsolete, I.E. an infinite shelf life. Clothing stores, shoe stores, hardware stores, jewelry stores, Etc. Even if the clothes, etc went out of style, you could just hold them for a generation or two and then they would come back in style.😉