Starting to Track Inventory - Do I need to file Form 3115?

[jess_]

2022 will be my third year of filing taxes for my small business (Schedule C). 

In the past 2 years, I have not been keeping track of inventory, and so I have skipped Part III: Cost of Goods Sold, and instead expensed all materials in Part II. 

Now, if I wanted to start tracking inventory and use Part III Cost of Goods sold, would I have to file form 3115?

Or would I be able to just enter "0" for my beginning inventory?

Would I then be able to only list my purchases made in 2022, and leave out any purchases made in prior years (even if some of the material used in my product was from prior years?) Since I have already deducted my expenses in prior years in those respective tax returns.

Any help would be appreciated. Thank you.

[Mike9241]

yes 3115 is required,  there is another issue when accounting for inventory as other than incidental materials and supplies that will probably require the use of the accrual method of accounting. sales will be recognized as income when made not when proceeds are received. and  an expenses when incurred rather than when paid

from the iRS. 

If you purchase or manufacture goods that produce income for your business, you may not be able to use the cash method of accounting. You can choose to use the accrual method for all of your accounting, but you also can choose a hybrid method of accounting. Under the hybrid method, you use the accrual system for sales and inventory purchases.

this is a complex step, so the use of a pro is advisable.  since there will likely be a section 481 adjustment. 

you probably have another option. accounting software like Quickbooks and Mint will allow you to see how your business is doing on an accrual basis but allow you to switch over the cash basis for tax reporting.  but the books have to be set up right

[jess_]

Thank you for your reply. In all my research I have found that there is no issue in using the cash accounting method. I am an artist who makes jewelry using raw materials like stones and metals. Why do you think I would need to switch to the accrual method?

I was just wondering, since I have already deducted my raw materials as expenses in 2020 and 2021, if I start tracking inventory now, I would only list purchases made in 2022 in Part III, even if some of my raw material from prior years was used in my income-producing products. 

Thanks for any clarification!

[DavidD66]

I would not file Form 3115.  I would do just as you described, and show a starting inventory of zero.  You would not include as COGS the ending inventory from last year, as it was included in your costs last year.   

[jess_]

Thank you so much for your response! That's a relief.