Tax time can be a real headache for sales reps, especially if they only work part-time. Many people who sell vitamins, cosmetics, cleaning supplies, scrapbooking supplies, or other items door-to-door, through catalogs and house parties, don’t know how to report this small business activity on their tax return.

If you sell for Avon, Tupperware, Shaklee, Creative Memories, or other like-minded corporations that use independent sales representatives to sell through catalogs and house parties, you must report all income, even if those sales are few.

The biggest problem here is that not everyone who signs up becomes a real sales rep; many of those who sign up only do so so that they can buy their own product at discounted prices. But before long, some of these reps find they can make a little extra money by throwing parties and handing out catalogs. And, once this happens, you will be in business and asked to report all inventory to the IRS.

Inventory is managed differently from any other business expense; a sales representative can only deduct the cost of items that have been sold. All remaining inventory expenses must carry over to the next fiscal year. If you get it wrong, your entire tax return could be audited.

Satisfying this IRS requirement generally only takes a few minutes, once you know what to do. Follow these three easy steps and you’ll be up and running in no time.

Step one – On December 31, make a list of all unsold inventory. This is all that is left on your shelves. Inventory is disposed of in four ways: sell it, use it yourself, give it away as samples, or throw it away. All are deducted; Your inventory count is just the product that remains on the shelves.

Second step – Find the monetary value of the unsold inventory. If you only sell for one business it’s simple, all you need are the invoices that were sent with each shipment. Put them in reverse order of date, with December bills at the top.

Now, starting with the last December invoice, locate each item left in inventory, highlighting the unsold items on the original invoices. Once you locate all the items on these invoices, put the rest of the invoices aside; You are only concerned with invoices that contain featured products for your inventory count.

Use these invoices to find the value of all the remaining inventory; This is the cost of the product plus a portion of the shipping costs. Inventory shipping costs are divided among the items purchased; therefore, if shipping were $ 10 for 10 items, each item would add $ 1 to the cost. Add it all up and you have the value of your unsold inventory. This figure is known as the year-end inventory value.

Step three – Report the cost of goods sold to the IRS.

Inventory is reported on the back of the Small Business Tax Form in Schedule C. There is space to report year-end inventory value, prior or “opening” year inventory value, added merchandise, product withdrawn for personal use and deductible inventory costs.

A new sales rep, or someone who sold all inventory before the end of the year, would have no inventory value from the previous year.

And that’s it, follow these three easy steps and you will get it right every time.