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Tax 1040nr

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Tax 1040nr

Tax 1040nr 2. Tax 1040nr   Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. Tax 1040nr The pay may be in cash, property, or services. Tax 1040nr It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. Tax 1040nr For information about deducting employment taxes, see chapter 5. Tax 1040nr You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. Tax 1040nr Empowerment zone employment credit (Form 8844). Tax 1040nr Indian employment credit (Form 8845). Tax 1040nr Work opportunity credit (Form 5884). Tax 1040nr Credit for employer differential wage payments (Form 8932). Tax 1040nr Reduce your deduction for employee wages by the amount of employment credits you claim. Tax 1040nr For more information about these credits, see the form on which the credit is claimed. Tax 1040nr Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. Tax 1040nr Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. Tax 1040nr These and other requirements that apply to all business expenses are explained in chapter 1. Tax 1040nr In addition, the pay must meet both of the following tests. Tax 1040nr Test 1. Tax 1040nr It must be reasonable. Tax 1040nr Test 2. Tax 1040nr It must be for services performed. Tax 1040nr The form or method of figuring the pay does not affect its deductibility. Tax 1040nr For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. Tax 1040nr Test 1—Reasonableness You must be able to prove that the pay is reasonable. Tax 1040nr Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. Tax 1040nr If the pay is excessive, the excess pay is disallowed as a deduction. Tax 1040nr Factors to consider. Tax 1040nr   Determine the reasonableness of pay by the facts and circumstances. Tax 1040nr Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. Tax 1040nr   To determine if pay is reasonable, also consider the following items and any other pertinent facts. Tax 1040nr The duties performed by the employee. Tax 1040nr The volume of business handled. Tax 1040nr The character and amount of responsibility. Tax 1040nr The complexities of your business. Tax 1040nr The amount of time required. Tax 1040nr The cost of living in the locality. Tax 1040nr The ability and achievements of the individual employee performing the service. Tax 1040nr The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. Tax 1040nr Your policy regarding pay for all your employees. Tax 1040nr The history of pay for each employee. Tax 1040nr Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. Tax 1040nr Employee-shareholder salaries. Tax 1040nr   If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. Tax 1040nr The excessive part of the salary would not be allowed as a salary deduction by the corporation. Tax 1040nr For more information on corporate distributions to shareholders, see Publication 542, Corporations. Tax 1040nr Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. Tax 1040nr For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. Tax 1040nr Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. Tax 1040nr If you give property to an employee as an employee achievement award, your deduction may be limited. Tax 1040nr Achievement awards. Tax 1040nr   An achievement award is an item of tangible personal property that meets all the following requirements. Tax 1040nr It is given to an employee for length of service or safety achievement. Tax 1040nr It is awarded as part of a meaningful presentation. Tax 1040nr It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. Tax 1040nr Length-of-service award. Tax 1040nr    An award will qualify as a length-of-service award only if either of the following applies. Tax 1040nr The employee receives the award after his or her first 5 years of employment. Tax 1040nr The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. Tax 1040nr Safety achievement award. Tax 1040nr    An award for safety achievement will qualify as an achievement award unless one of the following applies. Tax 1040nr It is given to a manager, administrator, clerical employee, or other professional employee. Tax 1040nr During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). Tax 1040nr Deduction limit. Tax 1040nr   Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. Tax 1040nr $400 for awards that are not qualified plan awards. Tax 1040nr $1,600 for all awards, whether or not qualified plan awards. Tax 1040nr   A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. Tax 1040nr   A highly compensated employee is an employee who meets either of the following tests. Tax 1040nr The employee was a 5% owner at any time during the year or the preceding year. Tax 1040nr The employee received more than $115,000 in pay for the preceding year. Tax 1040nr You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. Tax 1040nr   An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. Tax 1040nr To figure this average cost, ignore awards of nominal value. Tax 1040nr Deduct achievement awards as a nonwage business expense on your return or business schedule. Tax 1040nr You may not owe employment taxes on the value of some achievement awards you provide to an employee. Tax 1040nr See Publication 15-B. Tax 1040nr Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. Tax 1040nr However, the total bonuses, salaries, and other pay must be reasonable for the services performed. Tax 1040nr If the bonus is paid in property, see Property , later. Tax 1040nr Gifts of nominal value. Tax 1040nr    If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. Tax 1040nr Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. Tax 1040nr For more information on this deduction limit, see Meals and lodging , later. Tax 1040nr Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. Tax 1040nr Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. Tax 1040nr For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. Tax 1040nr Fringe Benefits A fringe benefit is a form of pay for the performance of services. Tax 1040nr You can generally deduct the cost of fringe benefits. Tax 1040nr You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. Tax 1040nr You also may not owe employment taxes on the value of the fringe benefits. Tax 1040nr See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. Tax 1040nr Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. Tax 1040nr Certain fringe benefits are discussed next. Tax 1040nr See Publication 15-B for more details on these and other fringe benefits. Tax 1040nr Meals and lodging. Tax 1040nr   You can usually deduct the cost of furnishing meals and lodging to your employees. Tax 1040nr Deduct the cost in whatever category the expense falls. Tax 1040nr For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. Tax 1040nr If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. Tax 1040nr Deduction limit on meals. Tax 1040nr   You can generally deduct only 50% of the cost of furnishing meals to your employees. Tax 1040nr However, you can deduct the full cost of the following meals. Tax 1040nr Meals whose value you include in an employee's wages. Tax 1040nr Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. Tax 1040nr This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. Tax 1040nr Meals you furnish to your employees at the work site when you operate a restaurant or catering service. Tax 1040nr Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. Tax 1040nr Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). Tax 1040nr This does not include meals you furnish on vessels primarily providing luxury water transportation. Tax 1040nr Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. Tax 1040nr This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. Tax 1040nr Employee benefit programs. Tax 1040nr   Employee benefit programs include the following. Tax 1040nr Accident and health plans. Tax 1040nr Adoption assistance. Tax 1040nr Cafeteria plans. Tax 1040nr Dependent care assistance. Tax 1040nr Education assistance. Tax 1040nr Life insurance coverage. Tax 1040nr Welfare benefit funds. Tax 1040nr   You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. Tax 1040nr For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. Tax 1040nr ). Tax 1040nr Life insurance coverage. Tax 1040nr   You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. Tax 1040nr See Regulations section 1. Tax 1040nr 264-1 for more information. Tax 1040nr Welfare benefit funds. Tax 1040nr   A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. Tax 1040nr Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. Tax 1040nr   Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. Tax 1040nr If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. Tax 1040nr   Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. Tax 1040nr The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. Tax 1040nr The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. Tax 1040nr These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. Tax 1040nr   For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. Tax 1040nr Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. Tax 1040nr However, if the employee performs no services, treat the amount you advanced as a loan. Tax 1040nr If the employee does not repay the loan, treat it as income to the employee. Tax 1040nr Below-market interest rate loans. Tax 1040nr   On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. Tax 1040nr See Below-Market Loans in chapter 4. Tax 1040nr Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. Tax 1040nr The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. Tax 1040nr You can claim the deduction only for the tax year in which your employee includes the property's value in income. Tax 1040nr Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. Tax 1040nr You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. Tax 1040nr Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. Tax 1040nr These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. Tax 1040nr Restricted property. Tax 1040nr   If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. Tax 1040nr However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. Tax 1040nr    “Substantially vested” means the property is not subject to a substantial risk of forfeiture. Tax 1040nr This means that the recipient is not likely to have to give up his or her rights in the property in the future. Tax 1040nr Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. Tax 1040nr However, your deduction may be limited. Tax 1040nr If you make the payment under an accountable plan, deduct it in the category of the expense paid. Tax 1040nr For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. Tax 1040nr If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. Tax 1040nr See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. Tax 1040nr Sick and Vacation Pay Sick pay. Tax 1040nr   You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. Tax 1040nr However, your deduction is limited to amounts not compensated by insurance or other means. Tax 1040nr Vacation pay. Tax 1040nr   Vacation pay is an employee benefit. Tax 1040nr It includes amounts paid for unused vacation leave. Tax 1040nr You can deduct vacation pay only in the tax year in which the employee actually receives it. Tax 1040nr This rule applies regardless of whether you use the cash or accrual method of accounting. Tax 1040nr Prev  Up  Next   Home   More Online Publications
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Rhode Island Department of the Attorney General

Website: Rhode Island Department of the Attorney General

Address: Rhode Island Department of the Attorney General

Consumer Protection Unit

150 S. Main St.
Providence, RI 02903

Phone Number: 401-274-4400

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Business Regulation

Website: Department of Business Regulation

Address: Department of Business Regulation
Division of Banking
1511 Pontiac Ave.
Bldg. 68-2
Cranston, RI 02920

Phone Number: 401-462-9500

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Department of Business Regulation

Website: Department of Business Regulation

Address: Department of Business Regulation
Insurance Division
1511 Pontiac Ave.
Bldg. 69-2
Cranston, RI 02920

Phone Number: 401-462-9520

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Department of Business Regulation

Website: Department of Business Regulation

Address: Department of Business Regulation
Securities Division
1511 Pontiac Ave.
Cranston, RI 02920

Phone Number: 401-462-9527

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Public Utilities Commission

Website: Public Utilities Commission

Address: Public Utilities Commission
Consumer Section
89 Jefferson Blvd.
Warwick, RI 02888

Phone Number: 401-780-9700

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The Tax 1040nr

Tax 1040nr 6. Tax 1040nr   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Tax 1040nr However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Tax 1040nr This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Tax 1040nr This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Tax 1040nr However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Tax 1040nr If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Tax 1040nr For more information, see chapter 2. Tax 1040nr Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Tax 1040nr These lines are reproduced below and are explained in the discussion that follows. Tax 1040nr 35 Inventory at beginning of year. Tax 1040nr If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Tax 1040nr Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Tax 1040nr Subtract line 41 from line 40. Tax 1040nr  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Tax 1040nr If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Tax 1040nr Opening inventory usually will be identical to the closing inventory of the year before. Tax 1040nr You must explain any difference in a schedule attached to your return. Tax 1040nr Donation of inventory. Tax 1040nr   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Tax 1040nr The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Tax 1040nr You must remove the amount of your contribution deduction from your opening inventory. Tax 1040nr It is not part of the cost of goods sold. Tax 1040nr   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Tax 1040nr Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Tax 1040nr For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Tax 1040nr   A special rule may apply to certain donations of food inventory. Tax 1040nr See Publication 526, Charitable Contributions. Tax 1040nr Example 1. Tax 1040nr You are a calendar year taxpayer who uses an accrual method of accounting. Tax 1040nr In 2013, you contributed property from inventory to a church. Tax 1040nr It had a fair market value of $600. Tax 1040nr The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Tax 1040nr The charitable contribution allowed for 2013 is $400 ($600 − $200). Tax 1040nr The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Tax 1040nr The cost of goods sold you use in determining gross income for 2013 must not include the $400. Tax 1040nr You remove that amount from opening inventory for 2013. Tax 1040nr Example 2. Tax 1040nr If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Tax 1040nr You would not be allowed any charitable contribution deduction for the contributed property. Tax 1040nr Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Tax 1040nr If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Tax 1040nr Trade discounts. Tax 1040nr   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Tax 1040nr You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Tax 1040nr Do not show the discount amount separately as an item in gross income. Tax 1040nr   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Tax 1040nr Cash discounts. Tax 1040nr   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Tax 1040nr There are two methods of accounting for cash discounts. Tax 1040nr You can either credit them to a separate discount account or deduct them from total purchases for the year. Tax 1040nr Whichever method you use, you must be consistent. Tax 1040nr If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Tax 1040nr For more information, see Change in Accounting Method in chapter 2. Tax 1040nr   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Tax 1040nr If you use this method, do not reduce your cost of goods sold by the cash discounts. Tax 1040nr Purchase returns and allowances. Tax 1040nr   You must deduct all returns and allowances from your total purchases during the year. Tax 1040nr Merchandise withdrawn from sale. Tax 1040nr   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Tax 1040nr Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Tax 1040nr You must also charge the amount to your drawing account. Tax 1040nr   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Tax 1040nr As stated above, you also use it to record withdrawals of merchandise for personal or family use. Tax 1040nr This account is also known as a “withdrawals account” or “personal account. Tax 1040nr ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Tax 1040nr Small merchandisers (wholesalers, retailers, etc. Tax 1040nr ) usually do not have labor costs that can properly be charged to cost of goods sold. Tax 1040nr In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Tax 1040nr Direct labor. Tax 1040nr   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Tax 1040nr They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Tax 1040nr Indirect labor. Tax 1040nr   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Tax 1040nr Other labor. Tax 1040nr   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Tax 1040nr Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Tax 1040nr Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Tax 1040nr Those that are not used in the manufacturing process are treated as deferred charges. Tax 1040nr You deduct them as a business expense when you use them. Tax 1040nr Business expenses are discussed in chapter 8. Tax 1040nr Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Tax 1040nr Containers. Tax 1040nr   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Tax 1040nr If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Tax 1040nr Freight-in. Tax 1040nr   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Tax 1040nr Overhead expenses. Tax 1040nr   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Tax 1040nr The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Tax 1040nr Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Tax 1040nr Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Tax 1040nr Inventory at the end of the year is also known as closing or ending inventory. Tax 1040nr Your ending inventory will usually become the beginning inventory of your next tax year. Tax 1040nr Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Tax 1040nr Prev  Up  Next   Home   More Online Publications