I 'thought' I did. But I was soooooo wrong. Our tax lady sent me home twice to redo it.
I hadn't been keeping a good record of supplies/materials/tools purchased. Mainly because I didn't know that I needed to. Duh. It wasn't until April of 2012 that I started to keep all my receipts. Tax Lady said " Chances are that you will never be audited by the IRS ...BUT just in case, you do need to keep good records and all receipts".
I had taken all my receipts with me when we went to her office. She just looked at me as if I'd grown two heads. I was instructed to go back home and come up with a record keeping system. I started out by hand writing on line paper. After a couple lines, I said " OH HECK NO!" and opened my Open Office.org free program that I normally just used for making my PDF files for my e-patterns. They have a spreadsheet in there! I've never in my life used a spreadsheet, and I'm probably doing it all wrong, but it's working for me.
Columns are already on the spreadsheet, so I just named them: SUPPLIES
( something to be used to make a craft item (fabric, wool, polyester filling, buttons, beads, etc) In the supply column I also add tools I've purchased - these are things that I need in order to make a craft item - such as scissors, thread, needles, hot glue gun, glue sticks, patterns, sewing machine, etc, and I color code tools in a light blue. The next column is COLOR - if it's fabric I describe as best I can what it looks like so I know later how much I have left. I'm going to try to take inventory of what I have every other month so that I don't overbuy, which I always do. If I purchase buttons or beads - I write down whether they are brown, black, blue, etc. The next column is QTY purchased, then PRICE and the DATE I bought it. QTY ON HAND is the amount I have left at the end of the year. It could be 0 if I used it all, or if I didn't use any, it's the same amount as Qty Purchased. You need to know exactly what you have on hand so you don't overbuy or run out of supplies.
Tax Lady says this is also very important for knowing what your COST OF GOODS SOLD, BEGINNING INVENTORY AND ENDING INVENTORY are at tax time. If you are a new crafter and this is your first year for claiming your craft income for tax purposes, your inventory at the beginning of the year is all the items you purchased in that year which includes tools and supplies. Let's say these cost you $500. Now when you create your crafts, you need to keep track of what it cost you to make them. This is where I had a hard time and why I was sent home twice, lol.
Let's say it cost you $3 to make one snowman ornie and one hour to make just one. For labor, you might add on $5 so now it's $8. you do some research to see what other items similar to this are selling for and come up with a final price of $7.Let's say you made 50 of these ornies and sold them all. It cost you $150 to make 50 ($3 x 50= 150 ), they sold for $350 Say this is all you sold all year. This would be your Gross sales. The COGS ( cost of goods sold) is $150 ( this is how much it actually cost you to MAKE the craft item) - and that is subtracted from the gross sales( $350 ) equaling $200 ( Gross Profit ) $200 is what you need to claim on income tax. Your beginning inventory is $500, you subtract your COGS ( $150) to get $350 which is your INVENTORY AT END OF YEAR. This will be your Starting Inventory for the next tax year. Beginning inventory - $500 ending inventory $350.
Keep in mind - if you have finished items that DID NOT SELL - these still count as inventory on hand.
Next year your starting inventory is $350 but any new supplies you buy will get added to that on line 38 of Schedule C (Profit or Loss from Business ( Sole Proprietorship) and totaled on line 40.
When your gross profits are $400 or higher you will also need to fill out a Schedule SE form ( Self Employment).