Assuming the business is a single member LLC that gets reported on SCH C as a part of your 1040 tax return, it's important to handle it correctly. I've lost count years ago of the number of folks who have messed this up big time, in their first year of business or first year dealing with inventory. If you want to use the inventory section then be aware of the following.
Take special note that in your first tax year dealing with inventory, the Beginning Of Year (BOY) inventory balance has to be zero. This is because your BOY balance must match exactly your prior year End of Year (EOY) inventory balance. So if this is your first year dealing with inventory and you already had inventory in your possession at the start of the tax year, you will include what you paid for that inventory in the “Cost of Purchases” box in that first year only.
Beginning of Year (BOY) Inventory Balance - This is what 'YOU" paid for the inventory in your physical possession on Jan 1 of the tax year. it does not matter in what year you paid for it either. Note that in your first year of business or first year of dealing with inventory, the BOY Inventory Balance *MUST* be zero, with no exceptions. This is because your BOY Inventory balance must match your prior year's End of Year (EOY) Inventory balance. If this is your first year dealing with this, then the only possible way for these two to match, is if the BOY Inventory balance is ZERO. There are no exceptions.
End of Year (EOY) Inventory Balance - This is what *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year. It does not matter what tax year you paid for it.
Cost of Purchases - What 'YOU" paid for inventory you actually purchased during the tax year. If this is your first year and you have inventory purchased in prior years, include what you paid for it here. (do not include costs for those things in other categories here)
Purchases withdrawn for personal use - What "YOU" Paid for inventory you pulled from your salable inventory for your personal use.
Cost of Goods Sold - What "YOU" paid for the inventory you actually sold during the tax year.
