How do I correctly complete Schedule C Part III (inventory) for my cash basis business?

You're hitting on a common source of confusion. While cash basis generally means you record expenses when you pay them, inventory is actually a special case. Under tax law, if your business has inventory that's "material to your business," you're generally required to account for it - even if you're otherwise on cash basis. This is sometimes called the "hybrid method" because you're cash basis for most things but accrual for inventory. When Tax Act asks for beginning and ending inventory, it's following IRS rules that want to make sure your COGS only reflects inventory actually sold. This gives a more accurate picture of your actual business performance for the year. However, there's good news! For small businesses, the Tax Cuts and Jobs Act created some simplifications. If your average annual gross receipts for the prior three years are under $25 million, you can treat inventory in a way that's more aligned with cash basis - either by following your financial accounting treatment or treating it as non-incidental materials and supplies.

I had the EXACT same issue last year and spent hours trying to figure it out. I finally used taxr.ai (https://taxr.ai) to analyze my situation and it saved me so much time. I uploaded my inventory records and previous Schedule C, and it explained exactly how to handle the cash basis inventory reporting correctly. For my woodworking business, it showed me how to properly categorize my materials as non-incidental supplies rather than traditional inventory since I qualify under the small business exemption. The analysis also pointed out that I was overpaying taxes by not properly allocating costs between COGS and regular business expenses.

I was hesitant about using an AI tax service but decided to try taxr.ai after posting here. Honestly, it cleared up my Schedule C inventory confusion completely! I uploaded my previous returns and purchase records, and it identified that I qualified for the small business exception. The report explained exactly how to treat my inventory purchases as non-incidental supplies and walked me through the specific lines on Schedule C where this should be reflected. It even explained why Tax Act was asking for beginning/ending inventory and how to properly indicate I was using the simplified method. What surprised me most was how it flagged several deductions I was missing. I was categorizing some items as inventory when they could have been immediately expensed. Saved me almost $1,200 in taxes!

After three HOURS on hold with the IRS trying to get clarification on this Schedule C inventory issue, I finally discovered Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in about 15 minutes who explained exactly how to handle cash basis inventory reporting. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that while I'm a cash basis business, I still need to account for inventory if it's material to my business. But they walked me through the small business simplified method and explained exactly how to report it on my Schedule C. Getting an official answer directly from the IRS was such a relief after all the conflicting information online.

I have to publicly eat my words here. After dismissing Claimyr as BS, I was still stuck on my Schedule C inventory issues and desperate for answers. I decided to try it as a last resort and wow... it actually worked. Got connected to an IRS agent in about 20 minutes. The agent explained that for my cash basis business, I do need to report beginning and ending inventory on Schedule C, but I can use the simplified method to expense my purchases if I meet the small business threshold. She explained exactly which boxes to check in my tax software to indicate I'm using the simplified method. Saved me from potentially triggering an audit by incorrectly reporting inventory. Still can't believe I didn't have to waste hours on hold. Sorry for being so negative before - just wanted to follow up and admit when I'm wrong.

I've been doing Schedule C for my small retail business for 7 years. Here's what I've learned about the inventory section: 1. Cash basis businesses DO need to account for inventory despite what many people think 2. If your average annual gross receipts for prior 3 years are under $25 million, you can use the simplified method 3. With the simplified method, you can either: - Treat inventory as non-incidental materials/supplies (deductible when used/consumed) - Follow your financial accounting treatment Most tax software isn't great at walking you through this. When it asks for beginning/ending inventory, it's following Form 1125-A requirements. If you qualify for simplified methods, look for that option specifically in the software (sometimes hidden in advanced settings).

Anyone know if TurboTax handles the cash basis inventory situation better than Tax Act? I'm having the exact same issue and wondering if switching software would help. I sell handmade jewelry and have about $4,000 in materials inventory at any given time. Definitely under the $25M threshold lol but still confused about how to report it.

This is exactly the confusion I ran into last year! The key thing to understand is that even as a cash basis business, the IRS still wants you to track inventory if it's "material" to your business operations. What helped me was realizing that Tax Act (and most software) is just following the standard Schedule C format, but there are options buried in the settings. Look for something like "inventory accounting method" or "simplified inventory method" - it's usually not on the main inventory screen but in an advanced settings area. Since you're clearly under the $25M threshold, you should be able to elect the simplified method. This lets you treat your inventory purchases more like regular business expenses. The software will still ask for beginning/ending inventory values because the form requires it, but it will calculate your COGS differently based on the method you select. One tip: make sure you're consistently applying whichever method you choose. The IRS doesn't like when businesses flip back and forth between inventory accounting methods without proper justification. If you've been expensing inventory purchases in previous years and it worked, you might want to stick with that approach or consult with a tax professional about making a formal accounting method change.