tax deduction question

You don't say if you are filing a business return, or if you are declaring "self-employed" income on a personal tax return.  So the following may or may not be relevant.

 

Discarding expired perishable ingredients is a required part of foodservice.  You expect a small percentage (about 5%) of consumables to be discards, and they count as legitimate  business expenses. No need to itemize discards--just put all those purchase slips into the "expenses" column of your accounting.

 

Track discards for your own benefit to avoid the loss of profit.

 

If somebody cancelled a cake, you had no income other than a nonrefundable deposit.  If you made the cake and it cost more than the deposit, then you should be collecting a larger deposit.  If you are called in for an audit, you would have to explain a habitual overspending (many cancellations) but one cancellation is again the expenditure of supplies and time that doesn't have a corresponding income. 

 

Some people donate cancelled cakes to charitable organizations and ask for a receipt for the retail value to use as a  deduction from their personal tax return.

 

Believe me--even a formal audit by the IRS is not going to ask where each package of fondant went. Not unless you are showing a major loss (like over $10,000) for more than one year in a row past your startup year.

Edited by BakingIrene - 1/14/13 at 11:09am

The ingredients you purchase should be deducted when you purchase them, whether or not they were actually used is irrelevant (provided they were not used for personal use).

Actually the answer is yes, all ingredients used for your business are deductible, whether they were used for a completed order, used for a cancelled order, or thrown out. What you can't do is take another deduction if you throw them out since you should have already deducted them when you purchased them.

Mybe there is still some confusion...if you purchased 100 packages of fondant in 2012 then you show all 100 packages as "expenses" on your 2012 return. Even if some is left.

 

If you had fondant left from 2011, then you should have shown that as "expenses" in 2011, so you cannot show it again as "expenses" in 2012.  Some places allow you to file a retroactive "correction" to your 2011 tax return, but my tax accountant said it was a hellish part of her job. 

 

The simplest form of accounting is to claim the full amount spent on consumables in  each tax year so you do NOT lose (assuming you align tax year and calendar year, another simple model).  The date on the purchase slip is what any audit will look at.

Edited by BakingIrene - 1/14/13 at 11:34am

Yeah, the IRS tends to frown upon people taking deductions for greater than 100% of the value of the item being deducted.

One further detail

 

Consumables are 100% deductible in the tax year of purchase. ALL food, plus cake boards, boxes, wrapping papers, whatever goes out the door with each cake. Cleaning supplies, etc.

 

Durable equipment gets a different rate of deductible year by year. This is because there is wear and tear on the equipment. Much like the replacement value of your car going down every year. "Depreciation".

 

Stuff like icing bags should count as "consumable" even if they are not sold as "disposables" because they wear out within one year of daily use. 

 

Is he keeping track properly?  Hey he started this, make sure he gets it RIGHT.

Edited by BakingIrene - 1/14/13 at 1:25pm