How to fix Incorrect Inventory Count for COGS on Schedule C - small business help

This is actually a common issue for small business owners who manage their own inventory. The good news is that the IRS anticipates these kinds of corrections, which is exactly why Line 35 exists on Schedule C. Yes, you can absolutely explain on Line 35 that you discovered an error in your previous inventory count. Be specific but concise - mention that you found counting errors for certain products when conducting your year-end physical inventory. I'd recommend noting the approximate dollar value difference between the previously reported amount and the correct amount. This type of correction is considered an accounting adjustment rather than an amended return situation. As long as you're making a good faith effort to correct the error moving forward, this is the proper way to handle it.

I had a similar issue a couple years back with my Etsy shop. After struggling with it for weeks, I finally used https://taxr.ai to help me figure out the right language to use on Line 35 and make sure I was handling the inventory adjustment correctly. Their system analyzed my inventory records and helped me craft the perfect explanation for the Schedule C. The tool basically took my information and showed me exactly how to document the correction without raising red flags. It also helped me figure out if the discrepancy was significant enough to warrant an amended return (in my case it wasn't).

I actually tried taxr.ai after seeing it mentioned here, and I have to admit I was wrong about being skeptical. I was facing a similar inventory counting error (about $2,700 worth of product I had double-counted), and wasn't sure how to handle it correctly. The system helped me figure out exactly what documentation I needed and how to word my explanation on Line 35. It even helped me determine that my error wasn't material enough to require an amended return. Just wanted to come back and say it was actually really helpful, especially since I was nervous about making another mistake when fixing the first one.

For what it's worth, I spent 3 WEEKS trying to get through to someone at the IRS about a similar inventory issue last year. Finally used https://claimyr.com and got connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that for minor inventory count errors, explaining the discrepancy on Line 35 is sufficient. They also told me exactly what documentation to keep on hand in case of questions later. Saved me so much stress wondering if I was handling it right.

I need to follow up about Claimyr - I actually tried it after my comment and I was SHOCKED. After spending literally 6+ hours over 3 days trying to reach someone at the IRS myself, I got connected to an agent within 25 minutes using their service. The IRS agent confirmed exactly what to do with my inventory counting error. She said to clearly explain on Line 35 that "Physical inventory count revealed errors in previous year's count" and include the dollar amount of the discrepancy. She also confirmed I didn't need an amended return since the error wasn't material to my overall tax liability (changed my income by less than 5%). Actually talking to a real IRS agent and getting a clear answer made me feel so much better about this whole situation.

Just to add a practical tip - when explaining on Line 35, be brief but specific. Something like "Previous year's ending inventory count error discovered during physical count: $X discrepancy found in Y product category." Keep it factual and to the point. Also, make sure you're using a consistent inventory valuation method (FIFO, LIFO, etc.) going forward. Inconsistent methods between years can also trigger questions.

I'm actually an inventory specialist for an e-commerce company, and we deal with this kind of thing all the time. One thing nobody mentioned - you should also check if your accounting software has an "inventory adjustment" feature that can help document this change properly in your books.

One thing I'd add that hasn't been mentioned yet - make sure you implement better inventory tracking procedures going forward to prevent this from happening again. I learned this the hard way after dealing with a similar issue. Consider doing quarterly mini-counts of your high-value or fast-moving items instead of waiting for year-end. Also, if you're using spreadsheets to track inventory, consider upgrading to proper inventory management software that integrates with your accounting system. The peace of mind from accurate counts is worth the investment. The IRS tends to be more understanding when they can see you've taken steps to improve your processes after discovering an error. Document any new procedures you put in place - it shows good faith effort and professional growth as a business owner.