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How Cost of Gods Sold Affects Income & Tax Bracket
- An increase in the Beginning Inventory decreases?income for the year.
- An increase in the Ending Inventory increases income for the year.
An increase in Beginning Inventory means that you will pay tax on the sale of that inventory?later (when you sell it).
An increase in the Ending Inventory for a tax year means that you are paying tax on the sale of the inventory for the tax year.
If the profit percentage & sales stay the same, and the beginning inventory increases, the income is postponed until the sale of inventory.
The longer the sale is postponed & accumulated, the higher the ending inventory is, the higher the income is, the higher the tax bracket is.
If the profit percentage and sales stay the same, the higher the Cost of Goods Sold (the Cost of Inventory being sold plus freight, etc) the lower the income the lower the tax bracket.