Handling Inventory Purchases Correctly

[flanRan8]

Hello, I started reselling new products (retail arbitrage - so no materials, supplies, etc to make inventory) online in 2021. I am using Schedule C and this is for my 2021 taxes. 

Here is the background for context 

So, all the inventory I got in 2021 was purchased by a friend through their business  and sent to me in 2021. So, here's the sort of twist (for me anyway):

My friend did not charge me at all for the inventory when they sent them to me in 2021 so I didn't technically purchase them that year but like I stated, I DID receive the inventory in 2021 and sold some of it in 2021.

In 2022, they then sent me the invoice for all the inventory they sent me in 2021 (invoice is also dated for 2022, not 2021) and I actually paid for them in 2022, so I made the inventory purchases in 2022.

I read here (under "Exception for Small Business Taxpayers"; upd. Jan. 2022) - https://www.irs.gov/pub/irs-pdf/p538.pdf

that since I qualify as a small business, I could treat my "inventory as non-incidental materials and supplies" and not have to do COGS, etc....this would be great. But can I even do this for 2021 inventory that I received (some sold), if I didn't actually purchase/pay for them till 2022?

If I'm unable to claim my inventory as non-incidental materials/supplies then I'll definitely need help figuring out how to correctly calculate my COGS for 2021 taxes as the next step, thank you in advance! 🙂

[Critter-3]

As a cash based taxpayer  you can only deduct in 2021 what you actually  paid in 2021.  If you put this on a CC then it is considered paid even if you did not pay off the CC yet.  If you wanted to deduct the expense in 2021 then you should have had them bill you in 2021 and paid the invoice in 2021.   If they did not get the payment in 2021 then they will not report the income in 2021 so you cannot deduct the expense in 2021 ... does that make sense?