Do small resellers have to keep an inventory for taxes?

What the IRS says

Three ways to account for inventory

Who is a small business taxpayer

The 2025 Schedule C instructions say you qualify if you have average annual gross receipts of $31 million or less for the 3 prior tax years (indexed for inflation) and you aren't a tax shelter. A business that hasn't existed for all 3 years averages over the period it has existed, includes a predecessor's gross receipts, and annualizes any short tax years.

The figure is the section 448(c) gross receipts test, which Publication 538 ties to the small business taxpayer definition. For tax years beginning in 2026, Rev. Proc. 2025-32 section 4.30 sets it at $32,000,000, averaged over the 3 tax years ending with the prior year. That section is worded for corporations and partnerships, the entities section 448 names; the Schedule C instructions apply the same inflation-indexed test to sole proprietors, at $31 million for 2025. The early-release draft of the 2026 Schedule C instructions (dated Oct. 8, 2026, not for filing) uses $32 million. Publication 538, last revised in January 2022, still prints the older $26 million figure.

Following your books: what the regulation's examples show

Treasury Regulation 1.471-1(b)(6) defines the non-AFS method as the inventory method used in books and records that properly reflect your business activities for non-tax purposes and are prepared under your accounting procedures. Costs your books don't capitalize to inventory aren't required to be capitalized, but no cost can be recovered before it is paid or incurred under your overall method. The rule applies to tax years beginning on or after January 5, 2021. The regulation's examples, most of them about beer, wine and liquor sellers:

• Books that expense purchases and don't use counts (Examples 2 and 6): the costs aren't capitalized to inventory. In Example 6, a cash-method reseller whose books expense inventory in the year paid, although its staff take regular counts, recovers all $550,000 it paid in 2020, including $50,000 of stock acquired on December 1 and paid for on December 20.
• A year-end count used in the books (Example 1): a store that uses its December 31 count to capitalize and allocate costs, and reports inventory on hand to its creditor, may not expense all its costs and must use the count.
• Counts used only in internal reports (Example 3): reports to owners are part of the books and records, so they are taken into account.
• A point-of-sale ledger reconciled with counts (Example 7): the seller must use the count and ledger to set ending inventory, and only the costs not allocated to ending inventory go into cost of goods sold.
• Booked in December, paid in January (Example 4): a cash-method business recovers the costs in the year it pays them.

Which example your books resemble

Our reading, not IRS text: a listing or inventory app that tracks the cost of unsold items and is reconciled with counts resembles Example 7, while a ledger that records each purchase as an expense and nothing about what's left resembles Example 6. Which one describes your books is a question for a tax professional.

The regulation itself, in 1.471-1(b)(8), treats a change in the method of treating inventory as a change in method of accounting, and says a business using the book method that wants to change how its books account for inventory must get the IRS's consent before using the new method for federal income tax purposes. Changing methods, below, covers Form 3115.

If you keep an inventory: identifying and valuing items

Publication 538 lists specific identification, when you can match actual cost to items, and FIFO or LIFO when you can't. It calls the LIFO rules very complex and says adopting LIFO takes Form 970 with the return for the first year.

For valuing, it lists cost, lower of cost or market, and the retail method, and says the method has to conform to generally accepted accounting principles for similar businesses, clearly reflect income and stay consistent from year to year.

Changing methods

To change a method of accounting for inventory, the IRS points to Form 3115. The Schedule C instructions add that a change can require a section 481(a) adjustment so income or expenses aren't counted twice or left out, and they use a switch to treating inventory as non-incidental materials and supplies as their example.

Worked examples

Edge cases

• The $2,500 de minimis safe harbor doesn't cover inventory, including inventory treated as non-incidental materials and supplies: see the de minimis safe harbor.
• Unless you are a small business taxpayer, the Schedule C instructions say you must use an accrual method for sales and purchases of inventory items.
• Small business taxpayers aren't required to capitalize certain expenses to inventory under the uniform capitalization rules, the Schedule C instructions say.
• If you choose to keep an inventory, Publication 334 says you generally must use an accrual method and value the inventory each year.

What to do

1. Choose a method with a tax professional and apply it the same way every year.
2. Whatever the method, record each lot's cost and the date each item ships to a buyer.
3. To change methods later, look at Form 3115 and the section 481(a) adjustment with a tax professional.

Questions