Inventory Update: Inventory Accounting Under TCJA

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!