Inventory Update: Inventory Accounting Under TCJA

Categories:

The IRS has issued proposed guidance on how independent pharmacies should handle inventory accounting under the Tax Cuts and Jobs Act (TCJA). In this video, Scotty Sykes, CPA, CFP® discusses your options for inventory accounting and some of the considerations you need to take into account.


You may also be interested in Accrual vs. the Cash Method of Accounting: Inventory Reporting Risks.


If you prefer to read this content, the video transcript is below.

Hey, this is Scotty Sykes with Sykes & Company. Today, we’re going to be talking about inventory as it pertains to the cash method of accounting under the Tax Cuts and Jobs Act.

First and foremost, if you’re not aware of what the cash method of accounting is and the Tax Cuts and Jobs Act, et cetera, for pharmacies, you need to go back at our previous content there and check that out. Because today this video here, we’re going to be talking about inventory as it pertains to that.

So the proposed, IRS-issued proposed regulations here, which will probably be final in the next few months on the cash method of accounting and inventory and essentially, when the Tax Cuts and Jobs Act passed, inventory was an unknown on how to treat that for tax purposes. You had some saying you can write it off, some saying you shouldn’t write it off, and everywhere in between, gray area. So we got a little more clarification on the IRS’ intent here, and essentially what it’s going to come down to is under the Tax Cuts and Jobs Act, you can treat inventory as inventory, just like as you normally would, you can treat as non-incidental materials and supplies, or you can treat it according to your books and records.

So we’re going to assume inventory is out. So we’re going to, inventory is inventory, so we’re going to assume maybe you, you treat it as non-incidental materials and supplies. If you did that, there was what they called a de minimis election. And essentially the de minimis election said you could write off amounts under a certain dollar threshold, which much of your inventory would fall under, and you saw a lot of pharmacies therefore used the de minimis election to write off non-incidental materials and supplies. And essentially, you’re writing off inventory. And the IRS has come back and said, uh-uh, your inventory treated as non-incidental materials and supplies would not be eligible for the de minimis election. So, with non-incidental materials and supplies, you know, it’s expensed when used or consumed, which essentially is the same thing as when you fill the prescription, which essentially is the same thing as just treating it as inventory. So you’re not going to see really any difference there, generally speaking, between treating it as inventory and treating it as non-incidental materials and supplies and the IRS has said you can’t use the de minimus with the non-incidental materials and supplies.

Secondly, you have the treat inventory according to your books and records. So there was talk that, hey you know, I keep inventory on my books and records, but at the end of the year, I do a journal entry to take it out of there for tax purposes. Well, that journal entry, the IRS is saying, you know, that journal entry is fine and great, but the IRS again, this is what their intent is from how I read it, the IRS is saying, we’re going to look at your whole books and records as a whole. Are you keeping inventory on the books? Do you have physical counts? Do you have a perpetual system? If the answer is yes, they’re going to say as a whole, you know, you need to be treating inventory on your tax as well, and not writing that off.

So, you know, the IRS is, is coming out pretty heavy here against writing off inventory. Of course, you need to speak with your advisors on what’s best for you. If you have written off inventory in the past, you need to consider what options are available to you, whether that’s amending or whatever it may be. You need to understand your options and what these proposed regulations are saying so you’re in compliance as best you can. But do know there’s been some developments here, there’s still some unknowns, you know, this is all my interpretation, really our interpretation, and I would expect some court cases out of this eventually, but that’s the update on the Tax Cuts and Jobs Act with inventory, and best of luck to you. If there’s anything we can do ask Sykes at www.sykes-cpa.com. Thanks!

Related Episodes

Compounding Success: Navigating GLP-1 Growth, Compliance, and Quality With Dr. Kevin Borg, PharmD

Looking at getting into compounding? Don’t just dabble, go all in.   That’s the theme of this week’s episode of The Bottom Line Pharmacy Podcast!  Scotty Sykes, CPA, CFP and Marketing guru Austin Murray of Sykes & Company, P.A. sat down with Dr. Kevin Borg PharmD,...

read more

Navigating the Pharmacy Marketplace Featuring Wade Hinkle, Founder and CEO of Pharmacy Market Place

Buying from primary vs. Secondary wholesalers, when is it best for your pharmacy and how does it impact your bottom line?   In this episode of The Bottom Line Pharmacy Podcast, Scotty Sykes, CPA, CFP, Bonnie Bond, CPA, and Ollin Sykes, CPA, CITP, CMA sit down with...

read more

The Bottom Line Pharmacy Podcast: Pharmacy Reconciliation 101: Managing Payments Effectively Featuring Vanessa Luu, Supervisor of Reconciliation at EnlivenHealth®

Is your pharmacy getting paid what it’s supposed to be getting paid? Make reconciliation your superpower!  In this episode of The Bottom Line Pharmacy Podcast, Scotty Sykes, CPA, CFP® and Bonnie Bond, CPA sit down with Vanessa Luu, Supervisor of Reconciliation at...

read more

The Bottom Line Pharmacy Podcast Pharmacy Automation Inside Out: Cost-Control and Tax Strategies Featuring Darin Gleason, ScriptPro

Questions about robotics and tax planning? Don’t miss this episode of The Bottom Line Pharmacy Podcast!  Join Scotty Sykes, CPA, CFP and Bonnie Bond, CPA as they sit down with Darin Gleason, National Sales Director for Retail Pharmacies at ScriptPro to discuss: ...

read more

The Bottom Line Pharmacy Podcast: Navigating Pharmacy Chain Closure Cash Flow Challenges Featuring Greco De Valencia Y Sanchez

With Walgreens planning to close 25% of its locations over the next 3 years, many independent pharmacies will face significant cash flow challenges from underwater scripts leaving and then coming back to new scripts transferring. In this episode of The Bottom Line...

read more

Maximizing Your Largest Expense – Inventory

Owning an independent pharmacy is not easy. Pharmacy owners have misreported inventory by millions of dollars, says Scotty Sykes, CPA, CFP®. Jared Barton of Inventory iQ* tells us how we can rectify the situation by putting the time and effort into the foundation of a...

read more

Search our Podcast Library

  • Type to Search

  • Filter by Category

  • Filter by Tag

Ready to take your pharmacy to the next level?

Contact us today to schedule a complimentary call with one of our pharmacy CPA advisors. Or jump right in and asses your growth potential with our Rx Assessment, exclusively for pharmacy owners.

CONTACT US      GET AN Rx ASSESSMENT

Schedule a complimentary call with one of our pharmacy CPA advisors, or jump right in and asses your growth potential with our Rx Assessment.

CONTACT USGET AN Rx ASSESSMENT