Correct Accounting Method on Schedule C

[flanRan8]

I started selling products online last year and was doing basic taxes for years so I'm new to all this and learning. I'm working on my Schedule C and need help with documenting an accounting method.

Currently, I calculated all my income and expenses EXCEPT my Sales and Inventory using the Cash method. I calcuated my Sales and Inventory using the Accrual method instead. I know I don't have to keep an inventory but I want to.

I'm following the guideline from this IRS document updated in January 2020 (https://www.irs.gov/pub/irs-pdf/p538.pdf) that states:

"If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales"

So my question is for filling out my Schedule C tax form because I do not want to make assumptions about how the IRS interprets my filled information.

If I am using Cash method of accounting for everything else but using Inventory method my Sales and Inventory, how exactly do I correctly fill Line F (Accounting Method) on the schedule C form? Do I:

1) Choose Cash accounting method and just assume the IRS knows and understands that I used Accrual accounting for my sales and inventory and Cash accounting for everything else based on their rule above

2) Choose Accrual accounting method and redo the rest of my bookkeeping based on Accrual method since that's the method I had to use for my inventory & sales 

3) Choose Other and put in Hybrid or Combination Method.

Thanks so much for your help!

[Carl]

When tracking inventory using COGS (Cost of Goods Sold) that is always what you might call "accrual" method. I think you're reading to much into it.

The cost that you paid for the inventory you sold are not deductible until the tax year you actually sell the inventory. It doesn't matter in what tax year that inventory was purchased either. So for income/expense accounting you are either using the cash method or the accrual method. There is no "hybrid" to speak of in your case, as regardless of the accounting method you use, it does not change how you account for inventory. 

When it comes to inventory, you "are" using the accrual method regardless of how you account for any of the other stuff.

[Critter-3]

 use  OTHER / HYBRID 

[flanRan8]

Hi, the person that replied before you said there is "no such thing as hybrid in my case" while you said to use HYBRID....I'm not sure who is correct here...

[pk]

@flanRan8 , having read through your post and those of  @Critter-3  and @Carl ,  I am even more confused. what all the noise is about.

Cash method implies  you book things only when you have  paid and when you have received .  

In the accrual method you book items  ( expense and income ) when orders accepted and/or delivered . So you carry a Payable   and Receivable book  in addition to Paid and Received books.  Thus  if you received material on 12/20/2021, you will book the expense in the book as  completed in 2021 even though you have not paid this till 01/01/2022.  There are advantages / disadvantages/ reasons  for this -- sometimes  you even have to carry reserves  on the books for this kind of situations.

On inventory , for most small  businesses, you buy, you pay and book the cost.  You compute your cost of Goods on a rolling basis  i.e. average over the whole year ( the easiest  way ) -- take inventory at the start ( which includes left-over from the year before and you take the same  again at the end of the year -- thus giving you an average cost of each item you sell during the year.

So where is the confusion here ?  What am I missing here.  It is still cash basis ( you pay , you book )

IMHO