Complicated Accounting Method Situation (Questions)

[avigo45]

Really need some guidance on how to handle this situation. Bear with me here!

Background:

For about 8 years I've had a small sole proprietorship (online shop) that I report on my taxes as a schedule C.

I was advised when I first started to file using the "Cash Method" of accounting and just list my COGS as a misc. expense as I sold them. So for example, if I spent $1,000 on inventory in a given year, I only reported the cost of the items I sold in that year, not the whole $1,000 and if I spent $500 on the items I sold that year I just listed $500 as a misc. expense titled COGS. Again, this is what I was advised when I started filing this Schedule C. Concerned if this was bad advice.

I have started to spend more on inventory and make more in profit so I am questioning my accounting methods and want to make sure I am moving forward properly. It is too late to find a qualified tax professional near me for filing my 2025 taxes but I plan to get one to help me with 2026.

Questions:

• Should I just file for 2025 as I have been and then have a tax professional help me moving forward?
• Is it possible to retroactively go back to claim expenses for cost of goods sold if I ultimately end up changing from the Cash Method to the Accrual Method or will I be leaving money on the table no matter what?
• Any other advice to help me navigate this without it being a total mess or losing too much money?

Really appreciate any help here. I am feeling very stressed about what to do.

[CesarJ]

From what you described, it actually sounds like you've been handling inventory correctly. Even if you use the cash method, inventory is generally deducted through Cost of Goods Sold (COGS), meaning you deduct the cost of items when they are sold, not when they are purchased. So if you spent $1,000 on inventory but only deducted the cost of items sold that year, that is typically the correct treatment.

You don't automatically switch to the accrual method just because your business has grown. Most small businesses under the IRS gross receipts threshold are allowed to continue using the cash method while accounting for inventory properly.

If you later determine that your prior treatment was technically incorrect, you generally don't amend multiple prior years. Instead, you will file Form 3115 (Change in Accounting Method) and calculate a Section 481(a) adjustment.

At this point, you likely are not leaving money on the table, assuming your COGS was calculated properly each year.

A good plan would be:

• File 2025 consistently
• Meet with a CPA or EA early in 2026
• Have them review your inventory method and determine whether a formal accounting method change is needed.

[avigo45]

Thank you very much. I should have added that I was simply just listing COGS as a misc. expense (this is what I was advised to do since the amounts were so low) and I have just kept with this method over the years. Not sure if this was bad advice or not. I actually believe it was advice I was given here in the community. 

I'm not sure if there is a more "official" way I was supposed to be doing COGS. I think that is where my concern is. I have accurately tracked and input my correct COGS each tax year but just not sure if the way I was inputing it will affect me moving forward (whether or not I switch from Cash to Accrual). 

[CesarJ]

If you were deducting the cost of items only when they were sold, then you were calculating COGS correctly, even if you entered it as a miscellaneous expense instead of in Schedule C COGS section. The issue is more about reporting location than the deduction itself.

Going forward, you should use the proper COGS section (Part III of Schedule C) and track beginning and ending inventory. If inventory amounts have grown significantly, switching methods or formally correcting it may require additional steps, so consulting a tax professional for future years would be wise.

@avigo45