In the example above, the $1,000 of items that you purchased is your inventory. If you sold $800 of these items during 2022, then you will report cost of goods sold as $800. This cost is subtracted from the income you received to sell these items. The remaining $200 of items you purchased, in this instance, remains in inventory and is expensed at the time you sell it. This is what we call the Matching Principle in accounting. You match the item sold to the revenue you received and report both the income and cost in the year the transaction occurred. The income and expenses for the year are entered on a Schedule C of your 1040. The net income or loss from that schedule is combined with the other items on your return to determine if you owe taxes and how much you owe.
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