Customers often come to Larry looking for special pieces. In order to meet custo

Question

Customers often come to Larry looking for special pieces. In order to meet customer needs, Larry often accepts orders and then travels looking for the desired item, which he purchases and delivers to the customer. The pieces are expensive, and Larry requires customers to demonstrate their sincerity by providing deposits. If it turns out that the item costs more than expected, Larry contacts the buyer and asks for additional funds. If the item costs less than expected, Larry refunds the excess amount. Also, Larry sometimes returns amounts he received in advance because he is unable to find what the customer wants. What tax issues should Larry

Explanation / Answer

Larry's Art gallery has a couple tax issue to consider First, Larry is going to have considerable expenditures to locate and deliver these items - He needs to make sure he is documenting the correct tax basis of the purchased item. For instance, if he purchases an item for $1000 and his costs to procure this item = $500 and then he sold it for $2,000 - His profit would only be $500 in which he would pay taxes on. Next, Larry needs to keep track of any advance payments or deposits and make sure they are not being recorded as earned income. Until he delivers the item, this money should be kept separate for tax purposes. Lastly, the money that Larry refunds customers should be documented as well & kept separate so it does not appear as an expense. There may be expenses involved in searching for an item, but the customer's deposit refund is not an expense.

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