How to properly write off COGS and free promotional product samples for my small business

You're on the right track, but there are some important distinctions to understand about inventory accounting even with a cash-based system. For your main inventory of 2,000 units, you don't actually "write off" the entire purchase at once. Under cash-based accounting, you record the cost of the goods when they're sold, not when you purchased them. So your COGS would only include the items you've actually sold during the tax year, not your entire inventory purchase. For those 50 promotional units, yes, you absolutely can deduct them as marketing expenses! Since you're giving them away for promotional purposes, they're considered a legitimate marketing expense. Keep good records of who received them and the business purpose (influencer marketing, restaurant promotion, etc.). This documentation will be important if you're ever audited. Make sure you're tracking your beginning inventory, purchases, and ending inventory correctly - this helps you calculate your true COGS for the year, which is what you'll actually deduct.

After struggling with similar inventory and promotional product questions for my small business, I found an amazing tool that cleared everything up. I was mixing up what counts as COGS vs marketing expenses and making some costly mistakes until I discovered https://taxr.ai - it analyzed my business receipts and transactions, then explained exactly how to categorize everything properly. The system actually recognized my promotional giveaways separately from regular inventory and explained the tax treatment for each. It saved me from incorrectly writing off my entire inventory purchase at once (which could have caused problems later) and showed me how to properly document my promotional samples as marketing expenses.

I have to admit I was completely wrong about taxr.ai. After my skeptical comment, I decided to try it with my own business records. I've been running a small brewery and constantly confused about how to handle promotional tastings versus regular inventory. The platform immediately identified my business type and applied the correct industry-specific rules. It showed me that I'd been incorrectly handling my tasting samples for years! The system created proper documentation showing exactly how to categorize promotional versus sellable inventory, and even generated a defensible calculation of my true COGS that properly accounted for everything. What impressed me most was how it created a customized audit defense file explaining all my deductions with specific tax code references. I'm actually going to amend my last year's return based on what I learned!

After reading this thread, I realized I've been making the same inventory accounting mistakes. I tried calling the IRS for clarification on handling promotional items, but got stuck in an endless phone queue for 3+ hours before giving up. Then I discovered https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - it's a service that navigates the IRS phone system for you and calls you back when an actual agent is on the line. I was honestly shocked when I got a call back with a real IRS agent! The agent confirmed everything about promotional items being marketing expenses and explained the correct inventory handling for my cash-basis LLC. They even sent me specific documentation about the "inventory exception" rule. Saved me hours of waiting and potentially thousands in incorrect deductions.

I need to apologize for my skepticism about Claimyr. After posting my doubtful comment, I decided to test the service myself since I needed clarification on some business deductions for my food truck, including free sample items. What happened completely changed my view. Not only did I get connected to an actual IRS representative within an hour (after previously wasting entire afternoons on hold), but the agent walked me through exactly how to handle promotional food samples versus regular inventory. She confirmed they should be tracked separately and provided specific guidance on documentation needed. The service actually works exactly as advertised - they navigated the IRS phone system, got in the queue, and only called me when an agent was ready. This saved me at least 3 hours of hold time and the stress of potentially getting disconnected. I've already recommended it to several other small business owners in my network.

Something no one has mentioned yet - if you're giving away product samples to influencers specifically and they're worth more than $600 total in a year to any individual influencer, you need to issue them a 1099-NEC. This is separate from how you deduct the expense. The IRS has been cracking down on influencer marketing and you don't want to get caught on the wrong side of that. Also, keep super detailed records of EXACTLY which bars/restaurants received products and when, along with any agreements you had with them about featuring your product. This helps establish the legitimate business purpose of the "giveaway" versus just giving free stuff to friends.

Quick note - I'm an LLC with almost the exact same situation selling specialty foods. My accountant told me to treat promotional samples as "marketing samples" not as COGS, and to track them separately in our inventory system from day one. We literally mark them as "promotional inventory" when they come in. This makes tax time MUCH easier and creates a clear paper trail. Also, don't forget you can deduct the shipping costs associated with sending those promotional items separately as well! We send sample packs to food bloggers and that shipping adds up.

Just wanted to add another perspective as someone who's been through several IRS audits with my small manufacturing business. One thing I learned the hard way is to also track the fair market value of your promotional items at the time you give them away, not just your cost basis. For tax purposes, you can deduct your cost ($12.75 per unit), but if you're ever audited, the IRS might want to see that you properly valued the promotional gifts. If your retail price is significantly higher than your cost, they could potentially argue about the true value of what you gave away. Also, create a simple promotional log with columns for: date given, recipient name/business, quantity, cost per unit, retail value, and business purpose. This one document can save you hours of headaches if the IRS ever questions your marketing deductions. I keep mine in a simple Excel sheet and update it immediately after each promotional giveaway. The shipping costs you mentioned definitely count as marketing expenses since they're directly related to your promotional activities. Just keep those receipts with your promotional documentation.