Starting Your Business

What are Business Expenses

Inventory

An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. See “Accrual Method” in Publication 538. However, certain taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. These taxpayers can also choose not to keep an inventory, even if they do not change to the cash method. See “Exceptions” in Publication 538.

To figure taxable income, you must value your inventory at the beginning and end of each tax year. To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. See “Identifying Cost” and “Valuing Inventory” in Publication 538.

The rules for valuing inventory cannot be the same for all kinds of businesses. The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Your inventory practices must be consistent from year to year.

 

Important References:                    

Publication 538                  Accounting Periods and Methods
Schedule C (Form 1040)     Profit or Loss From Business
Instructions for Schedule C (Form 1040)