 Donation of inventory. If you contribute inventory property that you sell in the course of your business, the amount you can claim as a contribution deducting is the smaller of its fair market value on the day you contributed it or its basis. So notice if you're you know giving inventory, contributing inventory, then you've got this valuation type of problem situation in terms what's the value of the inventory because you bought it for a certain price and then you're going to sell it for you know the retail price or whatever. So 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. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost to good soul. If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero zero zero zero zero. And you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. A special rule may apply to certain donations of food inventory. See publication five to six charitable contributions for more or more information there. Example one you are a calendar year tax payer who uses an accrual method of accounting in 2022. You contributed property from inventory to a church. So you go you got a church. You're going to give something to them. You're going to give them not cash but the inventory. It had a fair market value of $600. The closing inventory at the end of 2021 property included $400 of cost due to the acquisition of the property. And in 2021, you properly deducted $50 of administration and other expenses attributable to the property as business expenses. The charitable contribution allowed for 2022 is 400 which is the $600 minus the $200. 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. The cost of goods sold you used to determining gross income for 2022 but must not include the $400. You remove that amount from opening inventory for 2022. That's kind of an unusual situation where we have this charitable contribution but it gets a little bit messy in those cases. So example two if an example one you acquired the contributed property in 2022 at a cost of $400 you would increase the $400 cost of the property in figuring the cost of goods sold for 2022 and deduct the $50 of administration and other expenses attributable to the property for that year. So you would not be allowed and a charitable contribution deduction for the contributed property. All right, let's go to line 36 purchase less cost of items withdrawn for personal use. So now we're taking taking stuff out for personal use. So if you are a merchant, use the cost of merchandise you bought for sale. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. So again, purchase less cost of items withdrawn for personal use. So in other words, if you're just buying inventory and selling it, then it's fairly straightforward because you're going to put it on the on the cost that you purchased it for. If you have inventory that you're constructing into end use, then because it's a manufacturing company gets a little bit more complicated. So once again, if you are a merchant just buying and and marking up and then selling inventory, use the cost of all merchandise you bought for sale. If you are a manufacturer, meaning you're converting the inventory from raw materials to finish good or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. So trade discount. The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. You must use the prices you pay, not stated prices in figuring your cost of purchase. In other words, you're purchasing these items of inventory, they had a stated price that sticker price, but you actually bought them for something other than the sticker sticker price, possibly less than a sticker price. Obviously, you want to record them from an accounting standpoint at the price that you actually paid for them, not the sticker price, because that's different. So do not show the discount amount separately as an item in gross income. So an automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount, for example, so cash discounts, cash discounts or amounts, your suppliers let you deduct from your purchase invoices for prompt payment. So these are a form of discounts that are usually a lot lower in an amount, because they're just trying to incentivize you to pay them earlier than you otherwise would as you do your time value of money. The general concept for time value of money from the payable side is I'm going to pay as late as possible without until I don't get penalized. And from the recipient side, they want to get their money as soon as possible. So if the recipient wants their money sooner than the terms of the agreement, they could try to give a small discount to incentivize that to take place. So there are two methods of accounting for cash discounts, you can either credit them to a separate discount account or deduct them from total purchases for the year. So we saw this in a prior presentation, if you're buying inventory, for example, you could say, well, I know I'm going to take on the discount. So even though I'm purchasing it on account, I'm going to assume I pay it within 10 days, instead of 30 days, for example, because they're going to give me a 10 a discount within 10 days, and I'm going to mark it in at that price, or you could say I'm going to just use the normal price, not including the discount that I'm going to purchase it for. And then when I do get that small cash discount, then what am I going to deal with it? I might have to record it basic. I can revalue the inventory after adjusting for the discount that they gave me, because I recorded it at the higher price, not including the discount, assuming that I'm going to pay them in 30 days instead of 10 days. But now I paid them in 10 days, and I got the discount. So am I going to adjust the value of the inventory at that point in time? Or because it's a fairly small discount, just record it possibly as income or something at the point in time, they give me the discount, which other methods you use, you must be consistent. If you want to change your method of figuring inventory cost, you must file form 3 1 1 5 for more information. You can see change in accounting method in chapter two. So 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. If you use this method, do not reduce your cost of goods sold by the cash discount. So then we got the purchase returns and allowances. You must deduct all returns and allowances from your total purchases during the year. Now this gets a little bit confusing because when we talk about returns and allowances, you can think about am I talking about the returns that are coming from the customers that I sold the inventory to that are returning know here we're talking about the inventory that you rejected that you bought from your vendors and you're returning it to them and therefore you must deduct all returns and allowances from your total purchasing during the year because you returned them.