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juvallerner
Returning Member

Cash Basis Inventory for Small Business Exception on Schedule C

I'm trying to confirm what the best way to record inventory purchases during the year if I plan to use the small business exception that allows cash basis and no tracking of inventory.

 

Should I report Schedule C Sole Proprietor / Small Business Cash Basis Inventory on line 22?

 

It looks like Part III is not relevant if cash basis is used.

4 Replies

Cash Basis Inventory for Small Business Exception on Schedule C

If you qualify for the exception  then don't use the inventory section at all ... you can enter the expense under supplies or make your own category if you wish.

Carl
Level 15

Cash Basis Inventory for Small Business Exception on Schedule C

I don't know if this would be a problem, raise flags, or anything. But if you qualify to just expense inventory and then you close the business without selling all of it, I'm not sure how that works with the IRS.

For example, you purchaes $10K of inventory in 2020 and only sell $1K of that inventory. Then you close the business at the end of 2020 with $9K of your inventory left over that you expensed. If that expensed inventory results in a loss for your business for the tax year, then what's the deal on that? you just get to keep it for yourself tax free? I have no idea how that works, or if the IRS would have reason to notice it.

Cash Basis Inventory for Small Business Exception on Schedule C

you just get to keep it for yourself tax free?

Yep.....nothing happens unless and until the taxpayer sells the stuff....if ever. Otherwise, the stuff has a cost basis of $0.

Cash Basis Inventory for Small Business Exception on Schedule C

If you choose that option, those items are treats as "non-incidental material and supplies".  Those are deducted use USED/SOLD, just like Inventory.  

 

So you still need to keep track of everything just like Inventory, so why not actually treat it as Inventory?

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