Can a cash basis taxpayer deduct inventory as expense?

For a cash basis taxpayer, inventory is generally not deducted as an expense in the same way other expenses are. Under the cash basis method, income is reported when received, and expenses are deducted when paid. However, inventory is typically handled under the accrual method, where the cost of goods sold (COGS) is calculated. Here's how it works: 1. **Inventory Accounting**: Even if you're a cash basis taxpayer, if you have inventory, you usually need to account for it using the accrual method. This means you track inventory purchases and sales, and calculate COGS, which is then deducted from your income. 2. **Cost of Goods Sold (COGS)**: To determine COGS, you start with your beginning inventory, add any purchases made during the year, and subtract your ending inventory. This calculation gives you the cost of the inventory that was actually sold during the year, which you can deduct. 3. **Exceptions**: The IRS allows some small businesses with average annual gross receipts of $27 million or less (as of 2023) to use the cash method for inventory, treating it as non-incidental materials and supplies. This means you can deduct the cost when you pay for the inventory, rather than when you sell it. If you're considering how to handle inventory as a cash basis taxpayer, it might be beneficial to consult with a tax professional to ensure compliance with IRS rules and to optimize your tax situation.

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