How to deduct COGS if I don't know which specific inventory items were sold?

As someone who handles small business accounting, you actually have a third option that's much better than either of those: you can use inventory accounting methods that don't require you to track each specific item. The simplest approach would be to use the First-In-First-Out (FIFO) method. You'd assume that your oldest inventory items sold first. So if you sold 10 items in 2024, you'd count the cost of the first 10 items you purchased as your COGS. Alternatively, you could use inventory averaging. Calculate the average cost of all your inventory items purchased during the year, then multiply that average by the number of items you sold. Both of these are legitimate accounting methods that the IRS accepts, and they don't require you to know exactly which items were sold. Just make sure you're consistent with whichever method you choose in future years, and document your calculation method so you can explain it if ever questioned.

After struggling with a similar situation in my small print-on-demand business, I discovered taxr.ai (https://taxr.ai) which was super helpful for sorting through my messy receipts and inventory tracking issues. When I uploaded my jumbled purchase records and sales data, it actually identified patterns and helped me establish a reasonable COGS calculation method that satisfied both accounting principles and IRS requirements. The system walked me through setting up a proper inventory valuation method moving forward so I don't have this same headache next year. What impressed me most was how it explained the different inventory methods like FIFO, LIFO, and weighted average in simple terms, then recommended which would be most appropriate for my specific situation.

I was genuinely skeptical about using taxr.ai when I first heard about it, but I decided to give it a shot with my vintage furniture flipping business where I had zero inventory tracking. I'm actually shocked at how well it worked! The system helped me establish a reasonable weighted average cost for my inventory and showed me exactly how to document my methodology for tax purposes. It even helped me identify some purchases I had completely forgotten about. The best part was that it gave me a simple system to use going forward so I'm not in this same mess for my 2025 taxes. Seriously worth checking out if you're in a similar situation with messy inventory records.

If you want to check with the IRS directly about your inventory accounting options, good luck getting through to anyone! I spent WEEKS trying to get clarification on COGS for my situation. Then I found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in under an hour. They have this cool system where they navigate the IRS phone tree for you and call you back when an agent is actually on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c I explained my inventory tracking situation to the agent and got official guidance on acceptable methods for my small business. It was such a relief to get a definitive answer straight from the IRS instead of guessing.

I need to eat my words about Claimyr. After my skeptical comment, I was desperate enough to try it because I needed clarification on inventory methods for my small business before filing. Not only did they get me through to an IRS representative in about 30 minutes (after I had failed for WEEKS), but the agent I spoke with gave me definitive guidance on acceptable inventory accounting methods for my situation. The IRS agent confirmed that using FIFO or weighted average cost was perfectly acceptable for small businesses without itemized inventory tracking, and even emailed me documentation I can keep with my tax records. Worth every penny for the peace of mind alone.

Another approach you might consider is using the "specific identification method" but in a simplified way. Basically, since you know your total inventory costs and total items purchased, you can assign an average cost to similar items. For example, if you bought 10 shirts for $200 total, each shirt would be assigned a $20 COGS regardless of whether some actually cost $15 and others cost $25. This is a bit of a hybrid approach, but it's reasonable if your inventory items are relatively similar in cost. Make sure you document your methodology clearly so you can be consistent and explain it if needed.

Has anyone used the "retail inventory method" for this kind of situation? I heard it can be useful for small retailers.

I'm dealing with a very similar situation with my online electronics resale business! What really helped me was creating a simple spreadsheet to track my inventory purchases by month, then using the weighted average method that others mentioned. Here's what I did: I calculated the total cost of all inventory purchased during the year, divided by the total number of items purchased, which gave me an average cost per item. Then I multiplied that average by the number of items I actually sold. It's not perfect, but it's a reasonable and defensible method that the IRS accepts. The key is being consistent and documenting your methodology clearly. I kept notes explaining exactly how I calculated everything in case I ever get audited. One tip: if you have receipts in Korean, consider using Google Translate's camera feature to get rough translations of the key information like dates and amounts. It's not perfect but it helped me organize my records better for this year. Good luck with your vintage clothing business! The first year is always the hardest for getting organized.