Correct Accounting Method on Schedule C

Forum|Forum|3 years ago
October 13, 2022
1 reply
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I started selling products online last year and was doing basic taxes for years so I'm new to all this and learning. I'm working on my Schedule C and need help with documenting an accounting method.

Currently, I calculated all my income and expenses EXCEPT my Sales and Inventory using the Cash method. I calcuated my Sales and Inventory using the Accrual method instead. I know I don't have to keep an inventory but I want to.

I'm following the guideline from this IRS document updated in January 2020 (https://www.irs.gov/pub/irs-pdf/p538.pdf) that states:

"If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales"

So my question is for filling out my Schedule C tax form because I do not want to make assumptions about how the IRS interprets my filled information.

If I am using Cash method of accounting for everything else but using Inventory method my Sales and Inventory, how exactly do I correctly fill Line F (Accounting Method) on the schedule C form? Do I:

1) Choose Cash accounting method and just assume the IRS knows and understands that I used Accrual accounting for my sales and inventory and Cash accounting for everything else based on their rule above

2) Choose Accrual accounting method and redo the rest of my bookkeeping based on Accrual method since that's the method I had to use for my inventory & sales

3) Choose Other and put in Hybrid or Combination Method.

Thanks so much for your help!

Not A Product Question

Carl

Level 11

When tracking inventory using COGS (Cost of Goods Sold) that is always what you might call "accrual" method. I think you're reading to much into it.

The cost that you paid for the inventory you sold are not deductible until the tax year you actually sell the inventory. It doesn't matter in what tax year that inventory was purchased either. So for income/expense accounting you are either using the cash method or the accrual method. There is no "hybrid" to speak of in your case, as regardless of the accounting method you use, it does not change how you account for inventory.

When it comes to inventory, you "are" using the accrual method regardless of how you account for any of the other stuff.

Critter-3

Level 15

use OTHER / HYBRID

flanRan8Author

Level 2

Hi, the person that replied before you said there is "no such thing as hybrid in my case" while you said to use HYBRID....I'm not sure who is correct here...