Do I have to pay income tax on stock???

Hi

I’m sole trader registered for vat.

I have disagreement with my accountant who is currently working on my annual income tax return.

From his draft trial balance my net profit is 46k where I took salary only 23k, The rest of 23k he is counting as net profit for the stock which I invested in last august 2022 but arrived in January 2023.

Why is he considering investment of 23k into new stock as net profit and I have to pay income tax on the stock?

Is something wrong here?, the accountant might charge income tax incorrectly or I have wrong business model.

I took only salary 23k but the rest 23k did not take that money for myself! Therefore, I am confused how I now have to pay TAX on that? Is there no way around that?

I just don’t understand why I have to pay income tax on stock that is not even sold.

Does that mean I will pay double income tax – now for 2022 on the unsold stock? And pay again when is sold in 2023?

I would appreciate any advice you can give me

Hi Metal Craft

Your accountant is right.

You are mixing up cash with profits.

Lots of people make the same mistake and their accountants explain it poorly.

The profit is the Revenue - the cost of that revenue.

To take a very simplified example:

Let's say you buy two items of stock during the year - one for €10,000 and the other for €6,000.
You sell the first one for €18,000 so your profit is €8,000.
You still have the second one in stock at the year-end.

The fact that you invested €6,000 in stock which you have not sold does not affect the calculation of profit.

You might have only €2,000 cash in the bank, but your profit is still €8,000.

Brendan

Say you took delivery of an item for €3,000 before the year end.
And sold it for €4,000, again before the year end.
But you did not pay for it until after the year-end.

So you have €4,000 cash in your bank account.

What do you think your profit on that item would be?

Brendan

Brendan Burgess said:

Hi Metal Craft

Your accountant is right.

You are mixing up cash with profits.

Lots of people make the same mistake and their accountants explain it poorly.

The profit is the Revenue - the cost of that revenue.

To take a very simplified example:

Let's say you buy two items of stock during the year - one for €10,000 and the other for €6,000.
You sell the first one for €18,000 so your profit is €8,000.
You still have the second one in stock at the year-end.

The fact that you invested €6,000 in stock which you have not sold does not affect the calculation of profit.

You might have only €2,000 cash in the bank, but your profit is still €8,000.

Brendan

Click to expand...

Hi Brendan
thanks for your reply. I am sorry to ask again, but I still don't understand! According to your example above if I made €8,000 on the first item, that is €8,000 profit and are you saying if I have another item in stock with I payed €6,000 for but did not sell yet plus lets say €1,000 in the bank is that counted as another €7,000 for income tax purposes? So, therefore are you saying that would be €15,000 in total for income tax purposes?

Also, What if I never sell the stock? So, then I will continue to pay income tax on it next year and until sold?
Is this the official way it works in Ireland? The revenue Taxing on unsold stock?

thanks

Metal Craft said:

if I have another item in stock with I payed €6,000 for but did not sell yet plus lets say €1,000 in the bank is that counted as another €7,000 for income tax purposes?

Click to expand...

You are confusing assets and profits. And it takes a little while to get your head around it.

Let's say you set up a business tomorrow. We will leave overheads out of it as they complicate it.

1) You go to the bank and they give you a loan of €10,000 .
Now your balance sheet shows an asset of €10,000 (cash in the bank) and a liability ( owed to the bank)
This has no effect on profit

2) You buy two items of stock for €10,000 and €6,000 on credit.
Again this has no impact on profit. You have €16,000 of assets and €16,000 of creditors

3) You sell the first one for €18,000 cash.
Now you have made a profit of €8,000 - this is the first transaction to create a profit.

4) Your balance sheet now looks like this
Cash €28,000
Stock : €6,000
Total assets: €34,000

Owed to trade creditors: €16,000
Owed to bank: €10,000
Total liabilities: €26,000

Net assets: €8,000
Funded by : Accumulated profits: €8,000

If you get tired of the business tomorrow. REturn the stock to the creditors and repay the bank, you will have €8,000 cash in the bank which is your profit.

Brendan

@Metal Craft should consider doing a Start Your Own Business or another course run by their Local Enterprise Office including basic education on accounting for micro businesses. An accountant already has enough on their plate in preparing accounts and returns within an economically viable budget without having to educate the customer on the most basic concepts