Yes. The only thing that you can't do is switch back and forth every year. Pick a tax method for your accounting and then plan to stick with it.
Thank you! That's means, under cash method for tax return, i can use either deduct the full inventory cost when purchase (cash method), or use cost of goods sold (accrual method), right?
Correct. But once you have made that selection on your tax return you are stuck with the choice. So make sure that you have thought this through.
Also, while you can deduct your full inventory when purchased using the cash method you will still have to enter your beginning and ending inventories accounted for using the cash method. So you get to deduct the total cost of the inventory minus what you haven't sold yet.
Thank you! I'm a little confused, would you mind explaining it a little more? If I "deduct the total cost of inventory minus the cost of what you haven't sold yet," then it's the actual cost of the cost of goods sold, not the full cost of the inventory at the time of purchase.
When using the cash method of accounting the cost of every item is expensed on the day that the money is spent. So the expense for products is everything that left your bank account during the calendar year. Accrual is taking the expense in the second that it is billed regardless of when the bill is paid.
You may be confusing this with cost or market for inventory costs. When deciding how to value the inventory you can use the actual cost of the product that you've paid for or you can use the market value of the product as it sits on your shelf.
In TurboTax when entering your business information you will come to this screen and tick this box-
Once you have done that you will reach this screen and you will need to enter your inventory here.
The next screen asks for you to enter your inventory numbers for the beginning and end of the year.
Whether you use Cash or Accrual accounting only changes the way you account for your income and expenses. It's effect on inventory is relatively minor.
...and just when I think I have a handle on things, I read another post that confuses me. :(
I'm going to ask a favor. Can you possibly dumb this concept down so I don't get thrown into prison in 2026? Thanks in advance!! Here's my situation:
In 2025, I'm selling trinkets on several online platforms, and I'm keeping a record of what I sell, the selling price, the fees, the taxes, shipping costs and the original price that I paid for each trinket. Many of these items are things that I've purchased in 2024, knowing I'd be reselling in 2025, hopefully for a profit. I'm also currently purchasing more trinkets in 2025, to continue reselling.
I assumed that on my 2026 taxes, I would type in a number based on my 1099-k forms (gross money that was paid to me), and I would simply subtract the original price I paid for that item, the fees, the shipping costs, etc--giving me a bottom line number of how much profit I actually made, and that's what I would pay taxes on.
Then I start reading and I'm seeing COGS and BOYE and EOYE and just when I think I've got my head around it, I see cash vs. accrual and I JUST DON'T GET IT.
I need someone to talk to me like I'm in first grade so I know I'm doing the right thing. Thanks again!
[PII removed]
Yes, we can give you the bottom line. And you will do the right thing by entering all of the income from the sale of your trinkets and entering all the expenses paid for trinkets in 2024 even if there are some that remain unsold. The explanations below should help with understanding.
Prior to 2018, when you had a product for resale (not a service business) then the IRS wanted you to track your inventory, or products unsold as of December 31st each year. This was your ending inventory for the tax year and it was not allowed to be used against income/sales for a tax year because they were still sitting on the shelf. This was considered as accrual method for the inventory only. Income has always been on the cash method for individuals.
Today we have the Tax Cuts and Jobs Act (TCJA): No ending inventory required if you choose the cash method. Include all of your income and deduct all of the cost for products. See the summary below.
Businesses with gross receipts below $26 million are considered eligible to use the cash method of accounting for their inventory.
This could change in the future however as of now this is still the tax law.
Thank you very much. So if I bought something in 2024 for $10.00 and sold it for $20.00 in 2025, I'll be paying taxes on the $10.00 profit. I think I get that.
It's the "inventory," part I don't understand. Why does it matter when I bought the item? If I have a receipt that I paid XXX for something and also proof that it sold in 2025 for XXX--isn't that all I need? Why does it matter what remains unsold at the end of the year?
Thanks again!
Not exactly. In 2024, you will deduct the cost of your trinket which will reduce income received from other sales in 2024. In 2025, you will report the income from your sale, however you already deducted the cost of the trinket in 2024 so the full sales price of $20 will be income. Also, in 2025, you will deduct your cost of all trinkets purchased regardless if they were sold in 2025. In the end it equals out.
Each tax year you are required to report all income received, period. You never report the 'profit' portion only in any tax year. It doesn't matter when you purchased your trinkets that you sold in 2025. You deduct all expenses for the trinkets you purchased in 2024, regardless of when they sold.
In tax year 2024 you will report all income received and you can deduct all of your cost of products purchased for sale regardless if they were sold. Same for 2025 and each new tax year.
Under the current tax law, you aren't required to actually enter inventory. It's important for you to track your profit per item as a business, however, as indicated earlier, you are not required to use inventory for your business. You can enter your purchases as materials or supplies on your Schedule C. It can be confusing.
[Edited: 02/12/2025 | 10:11 AM PST]
Thanks again, but now I'm even more confused than I was when I first posted. :( Just when I think I get it, that "inventory," thing gets mentioned and it just doesn't make sense. I want to sell a stockroom full of stuff and pay the appropriate taxes on my profit. Surely millions of people are doing this so it must not be this confusing. Am I counting everything at the end of the year that I have sitting around? If I buy something to sell this year and I sell it NEXT year, don't I just incorporate those figures into NEXT year's taxes? $5.00 item that sells for $10.00 and I pay taxes on the $5.00 profit NEXT year?
Pulling my hair out here.
Am I counting everything at the end of the year that I have sitting around? No. Not if you are not keeping an inventory as a small business, you do not need to count anything at the end of the year, unless you just feel like it for your own information.
If I buy something to sell this year and I sell it NEXT year, don't I just incorporate those figures into NEXT year's taxes? $5.00 item that sells for $10.00 and I pay taxes on the $5.00 profit NEXT year? Yes and no. This year you would take a deduction for the $5 and then next year you would pay taxes on the $10. because YOU ALREADY TOOK A DEDUCTION for the $5 you spent on your tax return the year before.
Basically, all you need to do is in the year you buy something, you include it on your taxes as a supply expense. So if in 2024 you bought trinkets and spent $100, then you would include that $100 as supplies on your 2024 tax return. Then if you sell them for $200 in 2025, you will NOT include anything as for supply expenses, but you will include the $200 that you received for selling the trinkets.
For your own accounting and tracking purposes you can look at what you spent and what you made as a profit on the items you sold, however, for tax purposes, the 2 do not need to be linked.
All you are doing is in the year you buy something include it on your return that year for tax purposes then totally forget that you spent that money the next year and then in the year you sell something include that income on your return and don't think about what you spent the year before. Your supply costs and your income do not need to be reported in the same year. They are reported when you spend the money or when you earn the money. If it is in the same year, then you will report both in the same year, but they are not linked to each other when it comes to tax reporting when you are not using an inventory method.
I absolutely appreciate your response. But I'm still confused. :(
"All you are doing is in the year you buy something include it on your return that year for tax purposes then totally forget that you spent that money the next year and then in the year you sell something include that income on your return and don't think about what you spent the year before. Your supply costs and your income do not need to be reported in the same year. They are reported when you spend the money or when you earn the money. If it is in the same year, then you will report both in the same year, but they are not linked to each other when it comes to tax reporting when you are not using an inventory method."
So if this is the case, then how to I account for the money I spent on something LAST year, if this is the first year I'm reselling? For example, I knew I'd be starting my reselling business in 2025, so in 2024, I bought thousands of dollars of inventory. When I sell something for $20.00 that I spent $10.00 on last year, I should only be paying taxes on the $10.00 profit, right? But according to what you've said above, I'll be paying taxes on the entire $20.00, which doesn't seem right. And what if I purchase $3000 of goods in 2025, but don't sell any of it? It seems like apples an oranges if what I'm purchasing and what I'm selling don't match up.
I just don't get why I'm keeping track of what I'm selling, what I paid for it (in previous years) and all of the fees...if none of this matches up in the end. Again, I'm obviously missing some important component here.
So if you did no business at all in 2024, but in 2024 you bought supplies so you could operate in 2025, then these would be considered start up costs. When you check the box in TurboTax that says you started or acquired this business in 2025, you will then be asked for your start up costs. This is where you will enter the cost of the supplies you purchased in 2024 and any other start up expenses you have. If your total supplies and other start up costs in 2024 were $5,000, then you would enter $5,000 and this would be fully deducted on your 2025 return as start up costs.
Start up costs can be deducted in full up to $5,000 in the first year of business and then they are amortized over the next 180 months for the rest of the amount over $5,000. For example, if you spent $20,000 on those supplies in 2024 then you would deduct $5,000 in 2025 as start up costs and then spread the other $15,000 out over the next 180 months.
So the information above will be relevant to you in future tax years...if you purchase supplies in 2025 (assuming you are operating the business in 2025 and the future), then you would include the supplies you buy on your 2025 return even if you don't use them until 2026 if you are not using an inventory method. This is how the cash method of accounting works. When you put cash out, you deduct it as an expense. When you bring cash in, you are taxed on it. It may not match up with the supplies coming and going, but it does match with the cash coming and going. So if in 2025 you spend $10 for the item, you will get that deduction in 2025. Then you will be taxed on the $20 in 2026 but in the end when you combine it you are still only taxed on $10 because it decreased your profit from 2025 for that $10.
If in 2025, after you are operating your business, if you purchase $3,000 in supplies and do not sell any of it, then you would still deduct it on your 2025 return. This may create a loss on your return if you spend more than you take in. When you are a small cash operating business that does not keep an inventory method, it is all about cash in, cash out, it is not about the individual item.
"Business startup costs. If your business began in 2024, you can elect to deduct up to $5,000 of certain business startup costs. The $5,000 limit is reduced (but not below zero) by the amount by which your total startup costs exceed $50,000. Your remaining startup costs can be amortized over a 180-month period, beginning with the month the business began"
Thank you, thank you! "Start-up Costs," makes perfect sense in the big picture of things--I knew I was missing some component regarding previous stock and that might be it! Like the others who responded, I absolutely appreciate your time and answer. Now I have a better grasp of things and can work out the details. 🙂
Brenda
@DianeW777 Thanks for this - very helpful. With TCJA and cash method, does this mean I should NOT check the box “my business carries an inventory” even though I purchased inventory/products in 2024 and have unsold inventory/products remaining at year end? If I expense ALL purchased inventory/products in 2024 (including unsold), where do I put this/label as in Schedule C? Appreciate your guidance!
Yes, you do not have to check the box and there is nothing you need to check on your Schedule C to indicate your choice. If you used inventory last year simply put zero for your ending inventory and the balance will be used. For the current tax year you can enter your products under supplies or materials.
Yes, you can ignore the cost of goods on the Schedule C. Yes, you can use supplies or any miscellaneous category if you want a specific name for the expense as you indicated. It's what you are comfortable doing but you do not have to reference anything to ignore inventory in your new business.
The key to start-up expenses is that the cumulative expense occurred before the business was officially opened for operations. You can choose a date reflective of that for the combined total of the start-up expenses.
@DianeW777 @Vanessa A Thanks for your expertise! In further reviewing the exception for small business taxpayers under the TCJA, if my accounting method is Cash and I treat inventory as "non-incidental materials and supplies", I can only deduct the inventory treated as NIMS in the year that the products are actually SOLD (not year purchased).
In this case, there doesn't seem to be a difference between treating inventory as NIMS or COGS except where the amount is listed (under Expenses vs. Cost of Goods Sold)? In other words, isn't the $ amount the same? As a new small business, I would prefer not to have to keep an inventory if not required but it doesn't seem like it makes a difference either way? In TurboTax, do I put "Non-Incidental Materials & Supplies" under "Enter Business Expenses Not Yet Reported"? This flows to Line 27a under Expenses.
The materials and supplies that make up the items you sell would best be categorized as purchases in the cost of goods sold section. To effectuate that, indicate that you have inventory when you enter your business expenses, but just leave the beginning and ending inventory values blank. Then you can enter your "purchases".
@ThomasM125 Thanks for your response. To clarify, I'm looking to utilize the exception for small business taxpayers as previously mentioned in this thread by @DianeW777 and @Vanessa A. My understanding is under the TCJA, I can treat inventory (including finished goods purchased for sale) as "non-incidental materials and supplies" and ignore the COGS section completely. However, it appears I can only deduct the inventory treated as "non-incidental materials and supplies" in the year that the products are actually SOLD (not the year I purchased them). I believe this means the numbers would be the same, just in a different place (either under COGS or Expenses). In TurboTax, do I put "Non-Incidental Materials & Supplies" under "Enter Business Expenses Not Yet Reported"? This flows to Line 27a under Expenses.
Deduct the cost of inventory/non-incidental materials and supplies as materials and supplies in the year purchased regardless of when they were sold. This is the intent of the the Tax Cuts and Jobs Act (TCJA) that began in 2018. Yes, you can use business expenses not yet reported. It is a suggestion to use 'materials and supplies', the choice is yours. Cost of goods is not required for you now and in the future unless the law is changed.
See additional details here: According to TCJA, businesses with gross receipts below $26 million (for 2024) are considered eligible to use the cash method of accounting for their inventory.
The choice is yours. For this reason you can list your inventory as materials and supplies each year without carrying an ending inventory amount as long as you meet the gross receipts qualifier. Under the revenue procedure, the gross receipts threshold in IRC Section 448(c) increases from $26 million for taxable years beginning in 2021 to $27 million for taxable years beginning in 2022.
@DianeW777 Thanks for clarifying. Do you recommend putting inventory purchases as "Materials and Supplies" on Line 38 in the COGS section, and putting 0 for beginning and ending inventory? Or should "Materials and Supplies" be listed under Expenses? Does it matter?
It doesn't matter. I would advise to use the method that clearly shows you the cost of your product for resale so that you can look at the return and know exactly what that number is. You should be consistent with the method you choose.