Have you ever had a moment when you got amazing news and then a few minutes later you find out that the news wasn’t as great as you thought it was? Unfortunately, a similar situation has cropped up in ecommerce circles with the new tax law. Here to help bring clarity to the subject is Josh Bauerle. In his conversation with Scott, Josh explains the confusion surrounding the tax law, how it will affect ecommerce sellers like you, steps you can take to make sure you are working off of the right information, and much more. Don’t miss a minute of this informative episode of The Amazing Seller!
Wait, what happened?
Like most ecommerce sellers you were probably pumped to hear about the new change in the tax policy that allows businesses to write off inventory whether they sell it or not. This news was hailed as a game changer as it would save small business owners a ton of costs when it comes to taxes. Sometimes that old saying holds, “If something sounds too good to be true, it probably is.” Josh Bauerle and Scott took their time and did their due diligence tracking down all the info they thought they’d need to bring this new change to the TAS community. As it turns out, the tax policy is not as clear as they thought it would be on this change. The debate continues as different CPA’s have different takes on how business owners should interpret the new tax law.
Why you need a CPA.
This issue serves as a prime example to show ecommerce sellers why they need to have established a relationship with a CPA that they can trust. The benefit of having a relationship with a CPA who knows your specific business is that they can take a look at this new tax policy and give you their professional opinion on how you should adjust your business practices accordingly. If you only take your financial advice from what you hear or read online, pause! You need a CPA in your corner helping you through all the ins and outs.
Don’t try to game the system.
If you’ve been around the TAS community for very long, you know that Scott works hard to make sure that the advice he gives toes the ethical line. He doesn’t want to walk right up to it or mess around with shady business practices, and neither should you! Some voices in the ecommerce community are sharing ways you can manipulate your business and game the system to work in your advantage. You should see blaring red lights when this happens! While it may take more work and cause you to take the long route to success, keeping your business practices ethical will allow you to build something you can be proud of. To hear more about this tax policy news and more from Josh and Scott, make sure to listen to this episode of The Amazing Seller!
OUTLINE OF THIS EPISODE OF THE AMAZING SELLER
- [0:35] Scott’s introduction to this episode of the podcast!
- [1:50] Scott welcomes Josh Bauerle to the podcast.
- [3:15] The guys talk about the confusion around the new tax policy.
- [8:00] Where is the line?
- [17:30] Closing thoughts from Scott.
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TRANSCRIPT TAS 608
TAS 608: UPDATE: NEW Inventory TAX Law DEBATE for Ecommerce Sellers
[00:00:03] Scott: Well hey, hey what’s up everyone! Welcome back to another episode of The Amazing Seller Podcast. This is episode number 608 and today I've got a pretty important update for you. And it actually has to do with…
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…the new inventory tax law. A little bit of a debate going on here since the episode aired that I mentioned this huge tax news for Amazon sellers but really just e-commerce sellers in general and we've learned a little bit.
And what I've decided to do is have Josh Bauerle come ac on who is a CPA but let me just say first even before I even go into anything here today as always, this is just information that we are collecting that we are finding and we are trying to find the correct answer and kind of just see both sides of the debate. But you always, always should reach out to our accountant or CPA and see what your tax situation looks like.
If they feel that this tax law will benefit you or even how you've done it in the past could have something to do with how you can do it in the future. So always, always reach out to your CPA or accountant. Like I said, this year is in debate right now. Like no one is really, really sure other than we think we can do this if we've set up our businesses a certain way. And we're just trying to figure this stuff out. So I just want to let you guys know, this is the most recent update right now as it stands depending on when you're listening to this.
So always do your own research. I am not an accountant. I am having my accountant on but he's not your accountant. So again, just go out there and find your CPA or your accountant or ask them the questions that you may have with this new tax law. So I'm going to stop talking so you can listen to this interview that I did with my good friend Josh Bauerle.
[00:01:53] Scott: Hey Josh what's up man? Welcome back and we're going to be talking more about this new tax law and everything that's been said since we did a podcast on it. And that was episode 591. And we were talking about how this is a game changer and what this means for e-commerce sellers and when that aired I got a whole bunch of emails, you got a whole bunch of emails and then you started to do a little bit more digging.
So I want to not necessarily clear it up because I'm not sure we're 100% know that there's like a one size fits all. But let's kind of talk through this here. And maybe catch people up better just watching this and listening to this for the first time.
[00:02:32] Josh: Yeah, for sure. I might have to think I set a record for most emails I've ever received after that podcast aired. So if I haven't responded yet, I'm working through that file of emails. It turned into a pretty big ordeal. It has actually been interesting because it sparked a debate and there's been very well-known CPAs on both sides of this debate saying, ‘Hey this actually does apply,’ and some saying no it doesn't apply at all. And then the middle ground of maybe it does for you but not for you. Yeah, where do you want to start? You want to start with what we kind of announced and then…
[00:03:04] Scott: Yeah, like kind of what was and kind of how it became a thing. How did it all of a sudden you’re like holy crap, like this is big news, like how did it all happen?
[00:03:14] Josh: Yeah, so it first it came on my radar, me and my partner and TPJ Andrew we had listened to a podcast with this CPA named Tom Wheelwright and Tom is the CPA for Rich Dad Advisors, Rich Dad-Poor Dad that whole company. So regardless what your thoughts on that book very, very well-known company, he’s a very respected CPA in the industry. Probably has I would guess the most known tax podcast. Not that tax podcasts probably get two million downloads a month or anything. But it's big deal. And came out with this podcast and specifically I know I sent you the transcript of it.
He specifically says, ‘If you're eBay sellers or Amazon sellers this is a huge deal because you basically shouldn’t have paying taxes this year because we can adjust your inventory and get your taxable income down. So we were instantly holy crap. Is this true? Of course, you go in assuming it is true because Tom Wheelwright is not going to come out and announce it. And we dug in and we found exactly what he was talking about. We found the ASCPA kind of asking IRS for clarification on something that seemed to confirm this. And we found another… In tax there’s what’s called, the big four, the four biggest ones.
They are not going to talk about this kind of stuff because they are not working with smaller clients like this. They are working with people that are doing hundreds of thousands of dollars So we couldn't find anything there. But we did find the 17th largest CPA from an entire country which specifically did a slideshow on this saying, ‘Yes, you can deduct the inventory now.” So at that point we were like you know what, Tom Wheelwright did it, 17th largest firm did it, the ASCPAs announcement seems to clarify this, it’s good, we're running with this, this seems to be true.
Well, we do on this huge podcast, The Amazing Seller. We announced this breaking news and we're instantly flooded with emails. And several of them said, ‘Hey, I run by my CPA he looked into this and he says this is true, thanks, this is awesome.' But then several others said, ‘Ran this by my CPA he does not agree with this at all because of this, this and this.’ Then we started digging into it more.
[00:05:16] Josh: Started reaching out to other CPAs we know and respect and they basically seem to be aligned and there's some here, some here and no definitive ground either way.
[00:05:28] Scott: Okay, so let's talk through this here really quickly. So what we were talking about as far as being an e-commerce seller, and the way that it has always been is like you can buy your inventory. Let's say you buy 1,000 units, you spend $5,000. You can't write that off or deduct it from your taxes until you’ve sold the unit. So if one unit sells and it's $5 you can deduct the $5. That's basically the simplest way to kind of dumb this down.
That's the way that I've always done it, we've always done it. Then we're like, well wait a minute this new thing is saying, if you buy inventory for sale and it's going into your business but you haven't sold it yet but you've purchased it technically the new tax law as it was being read by numerous people is that you can now deduct that if you make less than…
What was the number? If you make less than…?
[00:06:17] Josh: $25 million in sales.
[00:06:20] Scott: $25 million in sales which a lot of people that are listening are probably going to fall into that category. So then everyone kind of got excited but then some people were reaching out to me being like, ‘Well Scott where's any documentation from the IRS on this? Like where is that? And where does this specifically say that,’ because my accountant, my CPA is saying that's not the way it is and then some people were saying that there was certain interpretations of like yes it could be but it depends on how it actually classify or how you kind of build your business…
You can like create a loophole like there's all these stuff. And this is where I'm going to call it time out and say listen, the stuff that we're talking about go talk to your CPA, your accountant, your business may or may not be able to take advantage of this. So definitely make sure that you do your homework. This here is a discussion that we are doing to try to bring you a little bit more clarification on this, so this way here you can make the right decision. Don't just assume that this is the case and any good accountant or CPA that you bring this to is going to say, ‘Wait a minute here. Let me double check it. Let me go through this stuff.'
Versus like just saying like, ‘Oh, it's true because so and so said it.’ So I just want to clarify that. Do your homework.
[00:07:31] Josh: And just explain on that It's just like medical advice, legal advice. Tax advice is something, when you hear it on a podcast that should be something that you're going to your trusted tax professional and saying, ‘Hey, I heard this. Does it apply to me?' It's not, ‘I heard this o a podcast I'm doing it on my tax return.'
[00:07:46] Scott: Right, absolutely. So let's talk a little bit about how this is being said on one side and how it’s being said on the other side. So let’s talk about where does the debate lie. Where is that?
[00:07:59] Josh: And we'll get a little bit nitty gritty here. But basically the tax law says now that if you're under that $25 million threshold, inventory can be treated as what they call non-incidental materials and supplies. The first one of that says, that those still just like inventory can only be deducted when it's sold, not when you purchase it. But then you did a little further down and there's this little further line that says unless your books and records treat it differently. Meaning, if your books and records, how you keep your books for your business, treat inventory as an expense when you buy then it's immediately an expense because they're allowing you tax returns from that reports and records.
That's the main thing that people are saying it's immediately deductible are hanging up. They’re saying, okay this line right here clearly says if your books and records which we'll call small businesses they're going to do their books on pure cash basis meaning when they buy inventory, it's going to hear their P&L and expense. As long as you're doing that in your books your tax return can match that. That's where for most people that on this side that's where they're hanging their hand out.
People on the other side of the coin are saying that does not apply to inventory itself. The IRS has always separately distinguished inventory as this own thing which can always only be deducted when it's sold. So they're basically saying since the IRS did not specifically come out and say inventory can now be deducted the same way it is in your books that does not apply to this exception. I've been digging and digging and digging since we've been hearing both sides of this. You cannot find a definitive answer either way at this point.
And like I said, there are people on very well respected, that have been doing it way longer than me on both sides of this equation that are adamant they are right. So if you're looking for a definitive answer, at this point we’re not going to find one. I thought Catching Clouds I know really sent a response specifically to our podcast that we did.
[00:10:01] Josh: I thought her response was very well thought out and explained it very clearly. And basically she said what we just said. There's no definitive answer. She did seem to say this at your own risk. This is risky because IRS has always treated inventory differently. I guess I wouldn’t necessarily, this wouldn’t call it risky. At this point I'd say we don't know. So you got to talk to your CPA. You got to make sure that you have someone that you can trust and isn’t just going to say, not it's never been that way, we can't do it.
They need to look into it.
[00:10:36] Scott: Yeah, and I think the one thing that she had said also which I thought was right on is like if you do it one way you need to do it that way. You can't just change things necessarily on the way… Like you can't just all of a sudden do something just to take advantage of that thing but you haven't done it that way or you are going to do it that way but then you're going to change back because then you’re going to have another loophole. Like then it gets kind of like you're trying to come up ways to game the system.
And that's not what we are trying to do. We're trying to do is… I know I am and I know when you and I sit down to our tactics it's going to be like all right, how sure are we that this is the way it is because if it's not then I might say you know what, I'm not going to go that route right now. I'm going to go the old-fashioned way right now and I'm going to do it the way I've been doing it until we get more clarification because I do not want to have to go back in time and go, ‘Holy crap, I took this $10,000 deduction now I got to go back.'
I might not do that. So that's why we've got time to figure this out but we do need to figure it out.
[00:11:42] Josh: And I guess I would say the thing I would adjust if your CPA you’re working with this kind of like we are at this point, I'm on the fence this is a little bit of a wait and see, I would not go buy a $100,000 worth of inventory to try and get the deduction. Don't make that until you're 100% positive that you're going to go this route.
[00:11:59] Scott: That's a great bit of advice. Do not say, ‘Okay, it's December 31st and I want to get that last deduction. I'm going to go ahead and drop 10 grand on inventory, now I get an auto… Don't do that. Please don't do that. If you're already going to purchase it, that's another story. But like us right now, like we've already purchased everything we're purchasing for this year, for 2018. We have some other stuff that's going to be delivered after the first of the year. We're not going to rush that to get that in so we can have that deduction right now.
I'm not going to that extreme.
[00:12:34] Josh: And the other thing is people need to consider, there is storage fees. Amazon has these storage fees. So a lot of times if you're trying to game the system by buying this inventory you don't need, you're going to pay as much or more on Amazon fees as you'd have paid on the taxes.
[00:12:49] Scott: Absolutely. And I've actually done away with that pretty much. We send in a lot of inventory that we don't sells through but we also have a warehouse here locally that we have everything shipped to so I can hold it. Which costs me, gosh, it might cost me 200 bucks a month, 300 bucks a month for a large size that I can house a lot of stuff. But if I was to have that stuff stored in Amazon, the fees especially in fourth quarter, holy crap, like they are like three times. So yeah, just be careful with that stuff.
And yeah, you can deduct the long-term storage fees but you don't want to do that too. So all right, cool. I know that we're going to be still digging but so there's nothing right now that's on paper from the IRS that says black and white this is this. If there's more stipulation like you can do this and this and this.
[00:13:37] Josh: Exactly. We know that there are portions that used to not be immediately deductible that are now deductible so like freight in, when you pay to have a shipping to Amazon or to yourself. That used to be a part of cost of goods sold like it's deducted when it's sold. That is immediately deductible now, customs fees, those are now immediately deductible. The purchase of the inventory itself is where the debate lies.
[00:14:01] Scott: Okay, that's pretty good because now like you said, if I spend $1,500 or $2,000 on freight then I can deduct that right away. Now, I can't deduct that and add in shipping later. I always tell people, I'm like okay what's your landed cost. If your landed cost is $5.25 how much of that is your shipping? It might $0.75. Well then you got to reduce your cost of goods when you then deduct those. It's pretty much common sense but you don't want to double dip there.
Because then you’re kind of grabbing more deductions that you're really supposed to. Okay, so that's good. So customer’s fees. Anything that it took to get that inventory here, we technically can. Again guys that’s what we got, you guys go out there, do your research, have your accountant, your CPA dig through the documentation and all of that stuff. And I know that we'll get more questions and emails and I know you're swamped with that stuff. Definitely still reach out to us if you have any questions. If you have any new findings, I mean Josh you want to know new findings, right?
Like if someone has something and they're like Josh here's something on paper and you’re like, ‘Cool, let me look at it.' Like that would be awesome. So if you guys can be out there and really maybe even if you find something send it to us and then if it's something that is worth sharing or worth noting we're going to definitely have a look at it. I just want to bring the most current information to you guys. I know Josh does this as well. And as soon as we have a definitive answer we will be the first one, hopefully out there to let you guys know if you're following along.
So contact your accountant, your CPA, get some advice, tell them where you are at if you want to share the podcast with them you can or any other… I think it's Catching Clouds. I'll link that stuff up so you guys can check it out. Was there anything that she had said in there that… Because I think she was just clarifying a lot of what you said and what a lot of other people are saying. There wasn't anything in there that you would disagree with, right?
[00:16:02] Josh: No. Not necessarily. No.
[00:16:05] Scott: I think that was interesting because I sent that over to you, I watched it and then I sent it over to you and you're like, I don't disagree. We've never said that there's black and white but what we're gathering, from all these, from other CPAs that are well known in this space that should have the answer we're kind of going off of them right now. All right, cool. So any other thing you want to wrap up with, Josh?
[00:16:29] Josh: No. I guess I would end it by saying that IRS tax code is 78,000 pages, whatever it is now of a lot of grey area. There's very little black and white, do this, don't do this. It's a lot of grey area. Which is why you have to be working with someone you can bounce ideas off of that will look into things that won’t just say, no, you can't do that or yes you can do that, I heard here. A lot of it is going to be very specific to your unique situation and you need someone that's going to look into it and see what does and does not apply to you.
[00:17:01] Scott: Yeah, absolutely. All right man. I'm going to let you roll and you can go get back to that paper work and start digging for that stuff.
[00:17:10] Josh: We'll definitely do our third update when we ever get… The final answer might not come until someone gets audited and says, ‘Hey, this is what the IRS said about it.'
[00:17:18] Scott: That is true. So yeah. We want to be careful but we also want to know the facts and as soon as we can get more information even if it's the smallest tid bit, we'll definitely bring it to you guys. So Josh, thanks again. I appreciate it and we'll keep people posted but you keep your nose to that book there and you find that answer more.
[00:17:36] Josh: That's the plan man. Thanks.
[00:17:37] Scott: All right man. Take care.
All right, so there you have it. Another update on this new inventory tax law. Hopefully this gives you a little bit more information but also things to ask your accountant or your CPA. Depending on when you're listening to this, things might have changed again. And I'm going to try to have Josh back on when we do have some more findings. I think after the first of the year it will probably become even more clear as more businesses like us come to our accountants and say, ‘Hey, what does this mean? Is it in black and white? Does it say we can do this or are there things that we have to look at as far as like a loophole to jump through to do this?’ And I don't necessarily want to do that as you heard in this episode that I said to Josh.
Like I'm not looking to kind of to game the system. I'm looking at doing it the right way. And I want to find out what is the right way. So again, contact your accountant, your CPA, ask them their opinions. You can do your own research, like I said you can go out there and find some of the top firms in the world and see what they are talking about as far as this new tax law that is potentially passed or that's been written in. Again, we don't have anything concrete as of just yet. But if it does mean what we think it means it's pretty big.
It's a pretty big deal. So, all right guys. This episode is 608 so you can head over to theamazingseller.com/608. Get all of the details over there. And then the other thing is depending on when you're listening to this, if you're listening to this when it airs which is in the middle of December, if you're interested in building your future proof business in 2019 and beyond I've got a brand new training that I am going to be doing here very, very shortly and it is going to be a full-fledged e-commerce building training as far as where we're going to take you through the entire process from how to pick the market, how to pick the right products and then how to build out additional assets and resources and start to get some external things happening with your business.
[00:19:42] Scott: So this way here you can monetize that stuff. Also where you’re able to start getting traffic from other sources. And it's something we're calling E-com Business Formula and it's a full-fledged training. So if you're interested, head on over to theamazingseller.com/training and you can get all the information over there.
All right, so that's it, that's going to wrap it up. As always remember I'm here for you, I believe in you and I am rooting for you. But you have to, you have to… Come on say it with me, say it loud, say it proud, “Take action.” Have an awesome, amazing day and I’ll see you right back here on the next episode.
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