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Inventory Problems in Construction Firms

Problems with the supply chain are a common occurrence for construction businesses. Their scope has expanded dramatically in recent years. Some severe slowdowns have occurred because of increased globalization, a pandemic, and geopolitical upheaval; however, things have generally been better.  A real estate CPA in Charlotte can help you understand it better.

The construction sector may plan for disruptions in the supply chain by storing essential products and materials in advance. However, an inventory could make tax preparation more difficult. There are significant considerations to make.

Cost-benefit analysis is the method used

Construction businesses frequently get into trouble with the IRS when trying to assign a value to their inventory. In the building trades, the cost of goods sold (COGS) is a significant outlay of capital and a key determinant of taxable income. The price of goods sold includes the value of stock on hand. The cost of goods sold (or COGS) is a valuable metric for assessing the financial impact of potential areas for cost reduction.

Since FIFO calculates COGS using historical rather than current ones, it can be helpful when prices are falling or when a construction firm is expected to be placed in a lower tax rate. Nonetheless, FIFO could cause inaccurate counts of available stock.

Reduced size

Damage, fraud, theft, and other causes of inventory loss are called “shrinkage.” Inconsistencies between physical stock and bookkeeping data can trigger audits and other business legal problems.

The IRS requires businesses to monitor inventory shrinkage and report discrepancies. If you do not factor in shrinkage, you could have an inflated inventory value, lower cost of goods sold (COGS), higher net income, and higher tax liability.

Be sure to secure your stock adequately to prevent losses due to theft. Cameras, motion detectors, and secure locks are just a few examples. You should also create a solid inventory management system and conduct regular physical counts.

Taxes at the municipal and state levels

Inventory may also be subject to taxes at the state and local levels. In addition to the more common sales and use taxes, property taxes may also apply to inventory.

The worth of a company’s stocked shelves as of a given date (often the end of the fiscal year) is subject to inventory tax in the jurisdiction where the business is based. Construction firms that operate in various jurisdictions may find it challenging to comply with tax and regulatory requirements due to differences in tax rates and rules between states and municipalities.

A reliable inventory management system is crucial for construction companies with many offices and keeping a wide variety of stock.

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