How to calculate COGS deduction for small business when I don't know which specific inventory items sold?

This is a common issue for small retail businesses. Since you have records of all your purchases, you can use the FIFO method (First In, First Out) to calculate your COGS. This is an accepted accounting method where you assume the first items you purchased were the first items you sold. So if you bought 10 items in January for $250 total, 15 items in March for $375, and you sold 18 items throughout the year, you'd calculate COGS as all 10 items from January ($250) plus 8 of the items from March (8/15 × $375 = $200) for a total COGS of $450. You don't need to match specific items - just track total inventory purchased and total inventory sold. Keep your receipts in case of audit, but the IRS doesn't require item-by-item matching for small businesses.

After struggling with a similar issue in my vintage furniture business, I discovered taxr.ai at https://taxr.ai and it's been a game changer for my record keeping problems. I had boxes of receipts and invoices with weird product descriptions that didn't match my sales records. Their system analyzed all my purchase records and helped me properly categorize everything for my Schedule C. The cool thing is it can handle foreign language receipts - I import items from Mexico and it translated everything and helped me organize by purchase date. This would solve your Korean receipt issue. I was able to justify a much larger COGS deduction than I initially thought possible, which saved me thousands.

I tried taxr.ai after seeing it mentioned here and I'm honestly impressed. I was that skeptical person asking questions earlier! My situation was even messier than OP's - I resell vintage electronics and had zero system for tracking inventory costs. The platform helped me organize everything by purchase date and suggested using weighted average for my COGS calculation. My accountant was super impressed with how clean my documentation was this year. I showed him my COGS calculation method and he said it would absolutely hold up in an audit. The best part was discovering I had about $3,800 in legitimate COGS deductions I would have otherwise missed. I'm actually looking forward to tax time next year now that I have a system!

If you're still struggling with this issue, you might want to try getting direct guidance from the IRS. I know, I know - getting through to a real person seems impossible. After spending DAYS trying to reach someone about my own COGS issue last year, I discovered Claimyr at https://claimyr.com and they got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that I could use the average cost method for my situation (I sell handmade jewelry) and gave me specific guidelines on documentation I needed to keep. Having that direct confirmation gave me so much peace of mind when filing.

I'm coming back to eat my words. After being super skeptical about Claimyr, I actually tried it when I was desperate to resolve a COGS issue for my Etsy shop before filing my extension. I had tried calling the IRS myself 4 times and never got through. The service connected me to an IRS rep in about 40 minutes (which is WAY faster than I ever managed). The agent confirmed that for my small business, I could use a simple inventory valuation method and explained exactly what documentation I needed. They even emailed me the relevant tax code sections that applied to my situation. I was able to properly calculate my COGS deduction and saved almost $2,200 compared to what I would have paid if I'd just reported everything as income without deductions. Sometimes it's worth admitting when you're wrong!

You could also try the "retail inventory method" which is an IRS-approved way of calculating COGS when you don't have detailed item-by-item tracking. Basically you: 1. Calculate your total inventory purchased during the year (which you have) 2. Add your beginning inventory (if any from last year) 3. Subtract your ending inventory (what you haven't sold yet) 4. That gives you your COGS For ending inventory, just count what you have left and estimate a reasonable cost based on your average purchase prices. This method is actually used by much larger businesses too and is totally legitimate.

Don't overthink this. I've been selling vintage toys for years and what I do is just track total inventory purchases vs total sales. I take my total purchase cost for the year, subtract the value of stuff I still have on hand, and that's my COGS. Easy peasy. Never had an issue with the IRS. Just keep your receipts in case they ever ask questions.

As someone who's dealt with similar inventory tracking issues in my small business, I'd recommend going with the retail inventory method that Camila mentioned - it's specifically designed for situations like yours where you have purchase records but can't match specific items to sales. Here's what worked for me: Calculate your average cost per item from all your Korean receipts (total spent ÷ total items purchased), then use that to value your ending inventory. The IRS accepts this approach for small businesses, and it's much more defensible than guessing or ignoring COGS entirely. Also, for future reference, consider using a simple spreadsheet or app to track inventory as you purchase it. Even basic descriptions in English will help enormously next year. You don't want to miss out on legitimate COGS deductions - they can significantly reduce your tax burden compared to just reporting everything as other income.