Part III. Cost of Goods Sold

In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year.

Exception for small business taxpayers.

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 nonincidental material or supplies or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally value the inventory each year to determine your cost of goods sold in Part III of Schedule C.