A Silver Club member using QB Online posted in the forum and said that their tax preparer questioned why the COGS on the Cash Basis report was so very different than on the Accrual Basis report.
At QB Winery Solutions we do not recommend running a cash basis report to prepare the tax return, because we strongly believe that even though you file your tax return on the Cash Basis, you should view all of your reports on the Accrual Basis. We also recommend that you use GAAP or full-absorption costing for your wine in QuickBooks. We call this the True Cost, and it includes the winemaking payroll, rent, equipment, supplies, and other winemaking overhead in addition to the grapes and packaging materials. Where as the Tax Cost only includes the grapes and the packaging material. If you use estate grapes, your Cash Basis Tax Cost only includes the packaging material.
All manufacturing type business will have a difference between the True Cost and Tax Cost of their products. This mean that calculating the COGS for the tax return is more complicated than adjusting for the timing of the payment of the invoices. All manufacturing businesses including wineries have these additional issues to consider when calculating the Cash Basis COGS:
- The Cash Basis Cost is different than the True Cost
- If the Accounts Payable includes grapes or packaging material (which it almost always does at the end of the year) you have to handle those amounts separately from the bills for overhead expenses.
If you had a retail shop that bought and sold wine, and you used QuickBooks Desktop, you could run a Cash Basis P&L and get an accurate COGS for the tax return. HOWEVER QB Online has a flaw, because the Cash Basis reports do not calculate inventory at all. When you use the Cash Basis reports in QBO your inventory purchases are booked directly to COGS.
This is what Intuit says about Cash Basis reports in QBO
If your business operates on a cash basis, you’ll need to customize the Profit & Loss report and change the accounting method to Accrual in order to see the correct Gross Profit amount.
In other words, in QBO the Cash Basis COGS calculation is not correct. The Tax Preparer must calculate an M-1 adjustment for the COGS. If you use our recommended costing book, this is actually a fairly simple calculation.
Despite my pleas and rants, I am aware that many folks enter the tax cost for the wine in QuickBooks because they were told that this was the only cost. Or their tax preparer told them that the tax preparation process would be easier this way. Would you prefer “easy” or “accurate”? Do you really want to risk making a fatal error by basing your sales price on a cost that is much lower than your True Cost?
Check out our free course Wine Costing in 6 Minutes for more.