Can small business inventory be expensed when purchased instead of only as COGS when sold?

Thanks for explaining this! So if our shop does about $175K in sales, we definitely qualify. Do we need to file any special forms to elect this method? And what happens if we've been using COGS in previous years - can we just switch methods?

You don't need any special forms, but you should include a statement with your tax return that you're electing to use the small business exception for inventory accounting. The statement should mention Section 471(c) of the Internal Revenue Code. Yes, you can switch from the COGS method to this simplified approach. It would be considered a change in accounting method, which generally requires filing Form 3115 (Application for Change in Accounting Method). However, there's a simplified procedure for small businesses making this specific change that might not require the full form. I'd recommend consulting with a tax professional to help with the transition paperwork since changing accounting methods can have some complexities.

How accurate is this taxr.ai thing? I'm always suspicious of tax tools claiming to find "simple solutions" because the IRS is never simple lol. Did it actually help with the Form 3115 or just give you general advice?

I've been looking for something like this! Does it work for service businesses with small inventory components too? I do photography but sell some physical products and the inventory tracking drives me crazy for just a few items.

For accuracy, I was really impressed. It's not just general advice - it analyzes your specific situation using your previous tax returns and business data. It correctly identified that I qualified based on my gross receipts and gave me customized documentation. It handled the Form 3115 simplification available to small businesses perfectly. For photography with small inventory, absolutely! That's actually an ideal use case. The tool is especially helpful for businesses where inventory is secondary to your main service. It will analyze whether the inventory component of your business qualifies for simplified reporting and guide you through implementation based on your specific situation.

How does this actually work? Do they just call the IRS for you? I'm confused how a service can get through when the hold times are like 2+ hours whenever I call.

I'm extremely skeptical. The IRS phone system is deliberately designed to be impossible to navigate. No way some service magically gets through when millions of people can't. Sounds like a scam to me.

They don't just call for you - they have a system that navigates all the IRS phone menus automatically and then stays on hold in your place. When they finally reach a human agent, you get a call to connect with them. So you're still the one talking to the IRS directly, but you don't have to waste hours listening to hold music. I was skeptical too initially! But think about it - they're not claiming to have a "special line" to the IRS. They're just using technology to handle the worst part (the waiting). I figured it was worth trying because I had already wasted so many hours trying to get through myself. When they actually connected me to an agent who could answer my specific question about inventory accounting methods, it was absolutely worth it.

That's not quite right. The cash method of accounting is different from the small business exception for inventory. With regular cash method, you still generally can't deduct inventory until it's sold. The small business exception specifically allows inventory to be treated as non-incidental materials and supplies which can be deducted when purchased OR as conforming to your financial accounting treatment. It's in Tax Code Section 471(c).

You're absolutely right, and I appreciate the correction. I was conflating the cash method with the specific inventory exception available under Section 471(c). They're related but definitely not the same thing. The small business exception is more specific and allows qualifying businesses to treat inventory items as non-incidental materials and supplies or to conform to their financial accounting treatment. Thanks for pointing this out - I don't want to spread misinformation.

I switched last year and did the math. For my business (women's clothing boutique), it was basically tax-neutral because my inventory levels are pretty consistent year to year. The time savings are MASSIVE though - easily 8-10 hours a month not counting physical inventory time. As for audit risk, this is a legitimate method authorized by the tax code for qualified small businesses. Just make sure you include the written election statement with your return and keep good records of your purchases. The IRS knows this method exists and is specifically allowed.

Great questions! I'd definitely recommend involving your CPA in this decision, even if you handle the day-to-day bookkeeping. While the election itself isn't super complicated, switching accounting methods has implications they should review - especially the first-year transition and how it affects your comparative financial statements. Your CPA can also help ensure the election statement is properly worded and filed. Some CPAs have templates for this, and they'll know if there are any state-specific considerations for California. Regarding state taxes - California generally conforms to federal inventory accounting methods, so you should be fine there. But your CPA will know for sure and can confirm there aren't any California-specific requirements or complications with making this election. The peace of mind of having professional guidance on the transition is probably worth the consultation fee, especially since you're already working with them annually.

Thanks for mentioning Rev. Proc. 2018-40! That's exactly the kind of specific guidance I was looking for. I'm not in the repair business, but I do have a small home goods store with a mix of consignment items and retail inventory, so the complexity is similar to what you're describing. The 6 hours per quarter resonates with me - I probably spend even more than that trying to track everything properly. It's encouraging to hear from someone who's done the research on the specific revenue procedure. Did you find any gotchas or requirements in Rev. Proc. 2018-40 that weren't obvious from the general discussions about Section 471(c)? I'm definitely going to read through that revenue procedure before making my final decision. It sounds like having the official IRS guidance on the simplified procedures could make this transition much smoother than I was expecting.