Do you have to do COGS/Inventory or can you just expense as materials/supplies for a very small side biz?

[MauryM]

I've heard different things from tax folks.  I'm confused as to how I would even compute COGS for my product as it has many small incremental expenses, some of which are somewhat random and not consistent.

Is there a threshold at which a small biz needs to use COGs/Inventory as opposed to expensing inputs as materials/supplies?

[tagteam]

---

@MauryM wrote:

Is there a threshold at which a small biz needs to use COGs/Inventory as opposed to expensing inputs as materials/supplies?

---

Yes, and it is extremely high.

See https://www.irs.gov/instructions/i1040sc#en_US_2023_publink24329wd0e2328

[tagteam]

Exception for small business taxpayers.

If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won't be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally value the inventory each year to determine your cost of goods sold in Part III of Schedule C.

Small business taxpayer.

You qualify as a small business taxpayer if you (a) have average annual gross receipts of $29 million or less for the 3 prior tax years, and (b) are not a tax shelter (as defined in section 448(d)(3)).