Does Schedule C still require COGS when using Non-afs section 471(c) inventory method for small business?

I run a small retail LLC and report everything on Schedule C. In my bookkeeping I use cash method accounting and just expense inventory purchases when I pay for them. I don't track individual inventory items or try to allocate inventory costs in any specific way. From what I understand about IRS Section 1.471, since my business qualifies under the small business exclusion, I don't have to maintain inventory records as long as my accounting is consistent and clearly shows my income. What I'm confused about is when I'm doing my tax return - do I still need to fill out the Cost of Goods Sold section on Schedule C? Or can I skip it entirely since I'm excluded from the inventory rules and don't track COGS in my regular books? If I don't complete the COGS section, should I attach some kind of explanation with my return? I found this example in the Cornell Law section that seems pretty close to my situation: "Taxpayer H is a partnership engaged in the resale of beer, wine, and liquor. For Federal income tax purposes, H uses the overall cash method of accounting, and the non-AFS section 471(c) inventory method of accounting." This sounds like my scenario (except I sell different products). "As part of its regular business practice, H's employees take regular physical counts of the inventory on the shop floor and in the storeroom, however H's method of accounting for inventory for its books and records does not allocate costs between ending inventory and cost of goods sold, and instead expenses the cost of the inventory in the year it was paid for." This matches how I operate. I have a rough idea of my physical inventory but no way to allocate individual costs between COGS and ending inventory. "Prior to December 2020, H acquires and pays for $500,000 of beer, wine, and liquor. In addition, on December 1, 2020, H acquires $50,000 in beer. H may recover as deductions in 2020 the $550,000 of inventory costs." This part is what I'm most interested in. It seems like I should be able to deduct all my 2024 inventory purchases as expenses without tracking COGS or starting/ending inventory values. But does that mean I leave the COGS section blank on Schedule C or do I still need to fill it out somehow?

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19 comments

Javier Cruz

•8M

Based on what you've described, you're on the right track with your understanding of the non-AFS section 471(c) inventory method. Since you qualify for the small business exemption, you can indeed follow the simplified accounting method that treats your inventory purchases as expenses when paid, rather than using traditional COGS accounting. However, you still need to complete the COGS section of Schedule C, but in a way that reflects your chosen accounting method. You would enter your inventory purchases for the year on line 36 (Purchases less cost of items withdrawn for personal use). For the beginning and ending inventory lines (35 and 41), you would enter zero since you're essentially treating everything as an expense when purchased under this method. I would recommend including a brief statement with your return that explains you're using the non-AFS section 471(c) inventory method as allowed under the small business exemption. This helps prevent questions from the IRS about why you're showing zero inventory values while operating a retail business. The example you found aligns perfectly with how you should handle this situation. Under this method, you can deduct all $550,000 of inventory costs in the year they were paid without traditional COGS accounting.

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Javier Cruz

•8M

Yes, your COGS would essentially equal your purchases for the year under this method. The benefit of using the COGS section rather than Part V is that it properly categorizes these expenses as inventory-related, which is more accurate for your type of business. The IRS expects businesses that sell products to use the COGS section, even when using simplified accounting methods. Putting these expenses elsewhere could raise flags during review. Additionally, if you ever need to change accounting methods in the future, having consistent treatment of these expenses in the COGS section creates a cleaner record.

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Malik Jackson

•8M

After struggling with a similar situation in my small craft business, I discovered taxr.ai while searching for help with Schedule C inventory questions. The site really saved me time figuring out how to handle the non-AFS section 471(c) method correctly! I uploaded my inventory purchase records and tax docs to https://taxr.ai and it analyzed everything, then explained exactly how to fill out Schedule C properly with this method. What I found especially helpful was that it flagged that I needed to include a statement about using this inventory method with my return - something I would have completely missed otherwise. It even generated the proper wording to use based on my specific situation.

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Malik Jackson

•8M

It definitely works with Schedule C and surprisingly understood the non-AFS inventory method details. It asked specific questions about my business size, gross receipts, and whether I had audited financial statements to confirm I qualified for the exemption. The guidance was very detailed - it showed exactly which lines to fill out and explained the reasoning. For your question about qualification requirements, the system checks against the current thresholds (under $27 million in gross receipts for the 3-year average). It asked for my revenue figures for the past three years and verified I met the exemption requirements before providing guidance. It also explained that businesses without audited financial statements have different options than those with them.

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StarSurfer

•8M

I was really skeptical about taxr.ai at first, but after spending hours trying to figure out this exact inventory method issue, I decided to give it a try. It was surprisingly helpful! After uploading my records, it confirmed I qualified for the small business exemption and walked me through exactly how to handle my Schedule C. What really impressed me was that it explained I need to be consistent with this method going forward and outlined what documentation I should keep to support my approach. This was way more helpful than the generic advice I got from my tax software. The site even pointed out that certain expenses I was categorizing as "supplies" should actually go through the COGS section to maintain proper accounting treatment. Definitely worth checking out if you're dealing with inventory accounting questions.

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Ravi Malhotra

•8M

I had the exact same question last year after switching to the non-AFS method. After multiple frustrating attempts calling the IRS and waiting on hold for hours, I finally found Claimyr through a tax forum. Used https://claimyr.com to get a callback from the IRS in about 20 minutes instead of waiting on hold all day. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed I should still use the COGS section on Schedule C but enter zeros for beginning/ending inventory and put all my purchases on line 36. They also recommended attaching a brief statement explaining I'm using the non-AFS 471(c) method. Getting clarification directly from an IRS agent gave me confidence my return was correct.

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Ravi Malhotra

•8M

It works by using their system to navigate the IRS phone tree and wait on hold for you. When an agent finally answers, it calls your phone and connects you directly to them. It calls the normal IRS number, not some special access line. They use an automated system that keeps your place in line while you go about your day instead of listening to hold music for hours. I was definitely skeptical too, but after wasting an entire afternoon on hold previously, I figured it was worth trying. The IRS agent I spoke with was actually helpful once I finally got through to them.

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Omar Hassan

•8M

I'll admit I was completely wrong about Claimyr. After another failed attempt spending 3+ hours on hold with the IRS yesterday trying to get clarity on my Schedule C inventory method question, I gave in and tried it. Within 35 minutes I got a call back and was speaking with an actual IRS representative who knew exactly what I was talking about regarding Section 471(c). The agent confirmed everything mentioned above - yes, you still fill out the COGS section on Schedule C when using the non-AFS inventory method, but you enter zeros for beginning/ending inventory and put your purchases on line 36. They also suggested attaching a brief statement explaining your accounting method. Definitely worth it to get an official answer directly from the source instead of guessing or relying on potentially outdated information online.

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Chloe Robinson

•8M

I dealt with this exact issue with my Schedule C business last year. The key is consistency in your approach. If you're using the non-AFS Section 471(c) method, you need to stick with it and document your choice. In my experience, the best approach is to complete the COGS section with zeros for beginning/ending inventory and your total purchases on line 36. I also attached a simple statement that said "Taxpayer qualifies as a small business taxpayer under section 471(c) and has elected to not account for inventories." One thing to watch for - make sure you consistently categorize your expenses. Don't put some inventory purchases in COGS and others in Part V expenses, as this could raise flags.

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Chloe Robinson

•8M

I attached it as a simple statement with my Schedule C. I typed it up with my name, tax ID, and the tax year at the top, then included that one sentence about the Section 471(c) election. I didn't have any issues with the IRS questioning this approach. They never contacted me about it. I think as long as you're consistent in your treatment and qualify under the small business exemption (under $27 million in average annual gross receipts), you'll be fine. The key is making sure you apply this method consistently going forward and don't switch back and forth between inventory methods without proper approval.

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Javier Cruz

•2M

I'm in a very similar situation with my small e-commerce business and have been wrestling with this exact question for weeks! Reading through all these responses has been incredibly helpful. What I'm still confused about is the timing aspect. Since I'm using cash method accounting and treating inventory purchases as expenses when paid, what happens if I buy inventory in December 2024 but don't sell it until 2025? Under the traditional COGS method, that would stay in ending inventory for 2024. But with the non-AFS section 471(c) method, it sounds like I can deduct the full purchase price in 2024 even though the sale won't happen until 2025. Is that correct? It seems almost too good to be true that I can expense inventory immediately when purchased rather than waiting until it's sold. I want to make sure I'm not missing something important about the timing rules. Also, does anyone know if there are any restrictions on what types of businesses can use this method? I sell handmade crafts online - would that qualify the same as a retail business?

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