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I own a small cottage business selling sports equipment. It's not my primary job, and last year I only sold $500 of equipment.

Here's the issue I'm facing: for the first time this year, I'm trying to "do things right," and that means accounting for COGS and inventory. The problem is, I've never reported COGS (yes, I've been paying taxes on revenue without deducting expenses -- the amount of money we're talking about has never made it seem worth it).

To calculate COGS for tax purposes, I have to enter the value of my inventory at the beginning of 2014 and the end of 2014. I have about $5,000 inventory. Here's the rub:

Your beginning inventory this year should be the same as your ending inventory for last year. If it's not, check the box below and attach a statement to your tax return explaining why.

As far as I see it, I have a couple of options here. I could simply pretend that I purchased all of the inventory this year, and say I started with $0 and ended up with $5,000. This would be a (harmless?) falsehood, though.

Most of the inventory comes from my father, who runs an electronics business, and gave me the inventory about ten years ago. (He also is a pretty seat-of-his-pants businessperson, and while he valued the inventory at the time of transfer, it was a gift, and there was no financial transaction.)

Should I just be honest with the IRS? Are they going to care? After all, all of my reporting from previous years favors them (at the height of my business, I accurately reported about $8,000 income, and minimal, non-COGS expenses).

Any advice would be welcome.

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