Small business taxpayer exemption from Sec. 471
Under Sec. 471 and Regs. Sec. 1.471-1, inventories are required to be used in a tax year in which the production, purchase, or sale of merchandise is an income-producing factor. The TCJA permitted taxpayers that meet the gross receipts test and that are not tax shelters under Sec. 448 to be exempt from Sec. 471 and to use either of the following methods:
- Treat inventory as nonincidental materials and supplies (NIMS inventory method); or
- Conform to the inventory method used in its applicable financial statement (AFS) (AFS Sec. 471(c) inventory method) or to the method in the taxpayer's books and records prepared in accordance with its accounting procedures if it does not have an AFS (non-AFS Sec. 471(c) inventory method).
It is important for small taxpayers to note that being exempted from keeping inventory under Sec. 471 does not necessarily translate to an immediate tax write-off for all inventoriable costs.
For taxpayers that choose to use the NIMS inventory method, the final regulations clarify that even though these amounts are treated as nonincidental materials and supplies, they still retain their character as inventory. The final regulations do not change the position that inventory treated as nonincidental materials and supplies is "used and consumed" in the tax year the taxpayer provides the inventory to a customer, and costs are recovered through costs of goods sold in that year or the tax year in which the costs are paid or incurred (in accordance with the taxpayer's method of accounting), whichever is later. The final regulations retain the general rule from the proposed regulations that the "used and consumed" threshold for NIMS is met only when the taxpayer sells the inventory.
thus you cannot expense the cost of unsold lots until sold.
if in year one you buy 4 and sell 1 you report the proceeds from that sale along with cost of the 1 lot sold.
that leaves 3 lots in the beginning of year 2. if you sell 2 lots you report the proceeds from the sale of those 2 lots along with the cost of the 2 lots sold
so at the beginning of year 3 you have 1 lot and if you sell it the reporting is the same as year 1
you may want to confer with a tax pro if this is a business the sales may be ordinary income not capital gain
