Answers · Deductions, assets & depreciation
How Should Inventory Be Treated for Tax Purposes?
Inventory rules determine when product costs become COGS instead of current expense.
How it works
The rule, and what it turns on.
IRC §§471 and 263A and simplified small-business rules can apply depending on facts/method.
Example
Parts bought for resale generally flow through inventory/COGS under the chosen permitted method rather than being deducted twice.
Common mistakes
What we see go wrong, and what we do instead.
- Expensing purchases and also reporting ending inventory.
- Changing method without analysis.
A better approach
- Maintain perpetual or periodic inventory records that reconcile to tax method.
Authority
Where this comes from, so you can check it.
IRC §§263A, 471 and 472-474 as applicable; Treas. Reg. §1.471-1; IRS Publication 538 and Form 1125-A instructions.
Educational information, not individualized tax advice. Treatment depends on your facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
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