Schedule C - Inventory
When filing your federal tax return using Form 1040, Schedule C is used to report profit or loss from a business you operated as a sole proprietor. If your business involves inventory, proper accounting is required to ensure compliance with IRS rules and to accurately reflect your income.
What is Inventory on Schedule C?
Inventory refers to goods held for sale in the ordinary course of business. For Schedule C filers, inventory must be accounted for using a method that clearly reflects income. This includes tracking the cost of goods sold (COGS) and adjusting for beginning and ending inventory.
Inventory Accounting Methods
- Required Method: You must use an accounting method that clearly reflects income. This typically involves tracking inventory levels and calculating COGS.
- Small Business Exception: If you are a small business taxpayer, you may choose not to keep an inventory, provided your method of accounting for inventory treats inventory as nonincidental material or supplies or conforms to your financial accounting treatment of inventories.
- Treating Inventory as Supplies: If you treat inventory as nonincidental materials or supplies, you deduct the cost in the year the items are first used or consumed in your operations.
Reporting Inventory on Schedule C
On Schedule C, you report the cost of goods sold (COGS) on line 32. COGS is calculated as:
COGS = Beginning Inventory + Purchases + Direct Costs - Ending Inventory
Ensure that your method of accounting for inventory is consistent and clearly reflects income. If you change your method, you must file Form 3115.
Additional Resources
For more detailed guidance on inventory accounting, refer to IRS Publication 538, which provides information on methods of accounting for inventories and related rules.
Source:
Schedule C (Form 1040) Instructions
Publication 538 - Accounting Periods and Methods
Disclaimer: Always verify details with the official Federal or State Department of Revenue Forms and Instructions.