Bookkeeping

Why would an accountant place materials used to install windows or cabinets or build a deck under cogs on a tax return.

My dad is an Independent contractor and hasnt filed his taxes in a few years, I’m helping him get things in order to prepare to file. I noticed the last couple if years returns were filed his preparer placed his materials expense under cogs. Wouldn’t the materials purchased like wood or windows be considered materials and supplies expense? Or am I doing my taxes incorrectly. I do remodels and claim all materials as a materials e pense.

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Answer

  1. 8 Answers

    Based on your scenario, regardless if it is COGS or Materials Expense, both are still expenses impacting the bottom line the exact same way. From strictly a tax standpoint, taxable income should be the same regardless of your classification of expenses as COGS or Materials Expense.
    However, from an accounting and analysis standpoint, one should be concerned with the most accurate depiction of your company’s financial transactions. Numbers tell a story.
    From an accounting and analysis standpoint, as a remodeling contractor, one would want to focus on two types of expenses: 1) money that is spent to keep your company running and 2) money that is spent to directly support the costs associated with providing your services on remodeling projects. The latter aspect is critical to the profitability of your business as it is primary driver of your bidding process. These direct costs are the costs most people consider COGS and would include materials and labor to perform the actual remodeling services. Professional accountants would encourage you to track the COGS for every project, and perhaps also include an indirect cost allocation of those costs to keep your company running – insurance, utilities, rent, etc. to accurately reflect your profitability on every remodeling job.

  2. 28 Answers

    Construction of materials are subject to Sales Tax in most states. It depends on the state you live in. Certain states will treat contractors like resellers who purchase materials and resell to a customer based on the terms of the contract (lump-sum or time vs material (itemized)). This means the materials would be considered Cost of Goods Sold (COGS) instead of material and supply expense. A lot of states tend to require treatment of this kind as itemized contract.
    • Lump-sum contracts: Arizona, Hawaii, Mississippi, Nebraska, and New Mexico
    • Time and Material (Itemized) contracts: Arizona, Colorado, District of Columbia, Hawaii, Indiana, Mississippi, Nebraska, New Mexico and Texas

    So, materials or direct costs for the final product (inventory: cabinetry, nails, window wrap, wood, etc.), labor directly used to create the final build are COGS. Job materials or Supplies Expense that will be used for business use (more than just contracted projects) i.e. saw blades, hammer, level, would be an expense that should be depreciated as a Fixed Asset over a period of time if they last more than a year.

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