topic Re: Can I stop calculating inventory? in Self employed

Can I stop calculating inventory?

misterno123 — Mon, 09 Mar 2026 11:12:42 GMT

I run a small business and I am sole proprietorship. I have been doing my taxes for many years and I did not know that I was not required to keep an inventory for federal income tax purposes.

If I stop entering my inventory this year is that against the rules?

Re: Can I stop calculating inventory?

ZoltanB45 — Mon, 11 Apr 2022 03:47:43 GMT

If your business is selling items, and you are still doing so, you will need to account for ending inventory.

Re: Can I stop calculating inventory?

misterno123 — Mon, 11 Apr 2022 03:50:53 GMT

But in the link below it says I dont have to

here is the excerpt

Note that, if you are a small business taxpayer, you are not required to keep an inventory for federal income tax purposes.

https://ttlc.intuit.com/community/self-employed-group/discussion/reporting-book-inventory/00/1614526

Re: Can I stop calculating inventory?

ColeenD3 — Mon, 11 Apr 2022 11:50:56 GMT

Yes, the post from @Anonymous_ is accurate.

The Cost of Goods Sold formula for retail businesses, generally, is:

Beginning Inventory (at the beginning of the tax year) Plus Purchases Minus Ending Inventory (at the end of the tax year). In the instance you cited, that would be $3012 (beginning inventory) less $2925 (ending inventory) which would equal a CGS of $87 (since you apparently had no purchases during the tax year).

In future years, you can enter the costs of materials and supplies used to produce your books or, alternatively, enter those costs as purchases.

Note that, if you are a small business taxpayer, you are not required to keep an inventory for federal income tax purposes.

From Pub 538: Exception for Small Business Taxpayers If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. A small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement (as defined in section 451(b)(3)). If it does not have an applicable financial statement, it can use the method of accounting used in its books and records prepared according to its accounting procedures. See Regulations section 1.471-1(b). If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.

Re: Can I stop calculating inventory?

Anonymous_ — Mon, 11 Apr 2022 13:44:02 GMT

Note the following when changing your method of accounting for inventory.

https://www.irs.gov/publications/p334#en_US_2021_publink10005555

Re: Can I stop calculating inventory?

misterno123 — Tue, 12 Apr 2022 02:32:15 GMT

Form 3115 is for people who wants to change the method of accounting of inventory.

I want to completely stop accounting for inventory. I checked form 3115 but I am not seeing any option for me

Re: Can I stop calculating inventory?

Anonymous_ — Tue, 12 Apr 2022 03:36:48 GMT

@misterno123 wrote:

Form 3115 is for people who wants to change the method of accounting of inventory.

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 choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine your cost of goods sold in Part III of Schedule C.

Re: Can I stop calculating inventory?

misterno123 — Tue, 12 Apr 2022 11:57:18 GMT

You said:

-----------------

If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories.

----------------------------------------

I am selling books only. So I buy books then store them and then resell online. So I will always have inventory

And I always account for inventory but if I am allowed not to do so, then I dont want to.

So in my case, can I stop accounting for inventory for federal income tax purposes?

Re: Can I stop calculating inventory?

DianeW777 — Tue, 12 Apr 2022 12:55:22 GMT

Yes, under the current tax law you do not have to show an inventory left on the shelves as of December 31st each year. You are allowed to deduct all of your purchased inventory each year based on the following rules from the Tax Cuts and Jobs Act (TCJA).

According to TCJA, businesses with gross receipts below $26 million (for 2021) are considered eligible to use the cash method of accounting for their inventory.

TCJA Comparison for Businesses: The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017.
Revenue Procedure 2018-40 provides further details.
- (1) Description of change. This change applies to a small business taxpayer, as defined in section 15.18(5)(a) of this revenue procedure, that wants to change its § 471 method of accounting for inventory items to one of the following:
  - (a) treating inventory as non-incidental materials and supplies under § 1.162- 3; OR or
  - (b) conforming to the taxpayer’s method of accounting reflected in its applicable financial statements, as defined in § 451(b)(3), with respect to the taxable year, or if the taxpayer does not have an applicable financial statement for the taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

The choice is yours. For this reason you can list your inventory as materials and supplies each year without carrying an ending inventory amount as long as you meet the gross receipts qualifier. Under the revenue procedure, the gross receipts threshold in IRC Section 448(c) increases from $26 million for taxable years beginning in 2021 to $27 million for taxable years beginning in 2022.

@misterno123

Re: Can I stop calculating inventory?

Anonymous_ — Tue, 12 Apr 2022 13:41:35 GMT

@misterno123 wrote:
So in my case, can I stop accounting for inventory for federal income tax purposes?

Yes, you can, and if you have been using the accrual method, you need to file Form 3115.

Re: Can I stop calculating inventory?

misterno123 — Wed, 13 Apr 2022 03:10:01 GMT

My understanding is this

If I want to stop accounting for inventory then I need to fill out 3115. And only this year I have to show my 2021 inventory purchases as deduction. Following years there will be no inventory accounting.

Is this correct?

Re: Can I stop calculating inventory?

Anonymous_ — Wed, 13 Apr 2022 13:48:11 GMT

Yes, technically you are supposed to file the form but, practically, you can probably get away with not filing it due to the size of your business.

Re: Can I stop calculating inventory?

JamesG1 — Sun, 17 Apr 2022 12:28:45 GMT

Yes, use IRS Form 3115 Application for Change in Accounting Method to request no longer reporting inventory.

Refer to Rev. Proc. 2022-14 for coding in Part I.

@misterno123