You don't have to report inventory, but you can't deduct the cost of unsold inventory.
So, if you report cost of goods sold, you must reduce it by the amount of your ending inventory.
If you report it as supplies, don't deduct the cost of inventory until it is sold.
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 account for inventories as materials and supplies that are not incidental, you deduct the amounts paid to acquire or produce the inventoriable items treated as materials and supplies in the year in which they are first used or consumed in your operations.”
IRS Publication 538
Unused inventory has not been used or consumed in the business and is therefore not deductible as an expense.
@HavaWorkman
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