Here is an article that explains in detail the reporting of inventory and Cost of Goods Sold (COGs) on your return. Although you are not required to report inventory if your receipts are 1 million or less as a Qualifying Taxpayer, the costs for what would otherwise be inventoriable items are considered to be NON-incidental materials and supplies to be listed on line 36 (purchases on Sch C). These non incidental costs however are deducted the year you sell the items, or the year you pay for them, whichever is later. Therefore, you do NOT deduct every raw material or wholesale product you purchased in the year even if you have inventory on hand. You only deduct the cost of materials associated with the finished product sold. If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year.
So you may not have to record inventory as a qualifying taxpayer, but you still need to include in COGs only those costs related to the finished goods sold. Therefore, it may be easier to record inventory to track these expenses anyway.
https://www.etsy.com/teams/7744/etsy-us-tax-bookkeeping-quickbooks-and/discuss/12057040/
