Do I have to capitalize overhead into inventory for tax purposes?

Depending on the size of the business, certain costs may need to be included in inventory under the uniform capitalization rules, and smaller businesses may qualify for simpler methods. Which applies to you depends on your revenue and how you produce, and it is worth confirming rather than assuming.

How often should we count inventory?

At least annually, and more often for high-value or fast-moving items. Cycle counts through the year catch shrinkage and costing errors early, and a count that does not tie to the books is itself useful information.

Can you help us figure out what a product actually costs to make?

Yes. A standard cost built from materials, labor and a reasonable overhead rate, then compared against actual results each month, is usually the most practical starting point for a small manufacturer.

Who I work with

Accounting for manufacturers

Manufacturers carry money in raw materials, work in process and finished goods, and the real margin depends on costing all three correctly. Clean inventory accounting is what turns a profit and loss into something you can price from.

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What the books need to handle

Inventory costing

Raw materials, work in process and finished goods valued consistently, with counts reconciled to the books so gross margin reflects what was actually sold.

Cost of goods and overhead allocation

Direct labor and factory overhead assigned to product in a way that is defensible for tax and useful for pricing.

Margin by product line

Reporting that shows which products, customers or runs are carrying the business and which are quietly costing it.

Equipment and capital planning

Fixed asset schedules, depreciation and financing decisions timed so a major machine purchase supports both cash flow and the tax position.

Numbers worth tracking monthly

Gross margin by product

What each product line earns after materials, labor and overhead.

Inventory turns

How quickly stock converts to sales. Slow turns tie up cash.

Scrap and yield

Material lost in production, which is margin that never reaches the customer.

Overhead absorption

Overhead applied to production against actual overhead, showing whether pricing assumptions hold.

Balance sheet accounts I keep workpapers on

Each of these is supported every month by a workpaper that ties the balance to a source document, so the number can be trusted and followed by anyone who reviews it.

Raw materials

Counted, costed and reconciled to purchases, with receipts matched to vendor invoices.

Work in process

Materials, labor and overhead in partly finished production, valued from job or batch records.

Finished goods

Units on hand at full cost, reconciled to counts and shipping records.

Inventory reserve

An allowance for obsolete or slow-moving stock, so inventory is not carried above what it can be sold for.

Month-end close for manufacturers

Physical or cycle counts reconciled to perpetual records
Receipts matched to vendor invoices and accrued if not yet billed
Labor and overhead applied to production
Variances between standard and actual cost reviewed and posted
Obsolete and slow-moving inventory reviewed for reserve
Fixed asset additions and depreciation recorded

Tax

Tax considerations

Inventory method

FIFO, average cost and other methods produce different taxable income when costs are moving. Smaller businesses may qualify for simplified treatment.

Uniform capitalization

Some production costs may have to be capitalized into inventory rather than deducted, depending on business size.

Equipment expensing

Machinery can often be expensed in the year placed in service rather than depreciated over time, timed around the year’s income.

R&D credit

New products and process improvements, including some shop-floor work, can qualify when activities and costs are documented.

General information, not advice for your specific situation. Call 239-896-6799 to talk through yours.

How I help

Common questions

Do I have to capitalize overhead into inventory for tax purposes?: Depending on the size of the business, certain costs may need to be included in inventory under the uniform capitalization rules, and smaller businesses may qualify for simpler methods. Which applies to you depends on your revenue and how you produce, and it is worth confirming rather than assuming.
How often should we count inventory?: At least annually, and more often for high-value or fast-moving items. Cycle counts through the year catch shrinkage and costing errors early, and a count that does not tie to the books is itself useful information.
Can you help us figure out what a product actually costs to make?: Yes. A standard cost built from materials, labor and a reasonable overhead rate, then compared against actual results each month, is usually the most practical starting point for a small manufacturer.

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