Taxes: How to include inventory purchased in prior years for new business on T2125?
Summary: amecollectibles is inquiring about how to handle inventory accumulated over the years when registering a new business as a sole proprietorship, specifically regarding the T2125 tax form. They express uncertainty about whether to add past purchases as "Purchases" in the first year, as the opening inventory must be $0. flipistics suggests that the cost of goods might be considered $0 for past inventory. ilikehockeyjerseys advises consulting an accountant and referencing official guidelines, suggesting that assigning a fair market value (FMV) might be an option, but underscores the importance of receipts. ricarmic adds that it's crucial to ensure the inventory value is reasonable to avoid declaring overvalued inventory for losses. recped asks about the business structure, which amecollectibles confirms will be a sole proprietorship.
I'm a collector, so in the past I've purchased in bulk/lots and removed some items for personal use. I've only sold a small number of used items from my collections on eBay in the past due to not having enough time to dedicate to listing/selling. Therefore, I've accumulated somewhat substantial inventory over the years.
I'm looking to register a business and put a more dedicated effort on listing/selling in the coming years, and I was just wondering how the inventory I've purchased in past years would get brought into a new business' inventory in regards to filing a T2125?
Do I need to determine the cost of all the inventory on hand, and in the first year of business add it as "Purchases"? (currently as Line 8320). I know the first year of business, your opening inventory must be $0.00 regardless.
(of course I'd look into hiring a competent CPA, but currently just trying to research things before taking steps forward)
recped
·3 years ago@amecollectibles
"I'm looking to register a business"
What form will this business take? Sole Proprietor or Corporation?
It would make a significant difference.
amecollectibles
OP3 years agoSorry, I didn't mention. Sole proprietorship.
ilikehockeyjerseys
·3 years agohttps://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/business-income-tax-reporting/inventory-cost-goods-sold.html
I am not an accountant, and this is not accounting advice. I would suggest consulting an accountant for the initial setup of your business.
According to that link, you should be able to assign a fair market value to your inventory that you are transferring from your own collection into your business as a business asset.
It is my understanding that if you are audited, you may have to justify both this fair market value, and whether there ever was or could be a reasonable expectation of profit with your business. Again, I am not an accountant, so that might be incorrect.
amecollectibles
OP3 years agoThanks for your input. Once busy season is over I'll be looking to sit down and consult with a CPA, but really this is a "next year" problem for me as it'll be unrelated to my 2022 taxes, but I was just curious to see if this was a situation anyone else has already found themselves in.
I do have receipts for a large number of the purchases (we're going back through the years all the way to like 2010ish) as a lot of them were made online vs in person/cash. I assume those would still be fine and preferable (and FMV for things I don't have receipts for)?
It would obviously be easier to justify/prove, and just less of a pain then FMV as value of entertainment memorabilia is so often more based on demand (and that's mostly what I have inventory of).
ricarmic
·3 years agoAs others have said this isn't official accounting advice but as @ilikehockeyjerseys mentioned I think the main goal will be to bring the value in in such a way that profit is reasonably expected. I suspect the government will be guarding against folks declaring overalued inventory to create intentional losses. As long as the input "merchandise inventory" value isn't offending that you're likely ok.
As a note, FMV is from a reselling perspective, in theory FMV could be below what you paid, because you could have been paying retail, but if you have receipts you should be using those anyway. The real accountant can help you figure out likely a simple and less work way to assign an overall value that will satisfy both the government and you.
This would be a very advantageous time to get real accounting help.
flipistics
·3 years agoI want to clearly state that I'm not a tax professional or accountant and you should verify this with one. I THINK if you choose to bring it into the business that the cost of goods would be considered $0 for that past inventory. Even if that's not correct, the error should be in favour of the CRA so you'd (probably) be fine.