Schedule C inventory requirements for our music business - can we stop using it if we rarely sell physical products?

The Schedule C inventory section accounts for the cost of goods sold (COGS) which affects your taxable profit calculation. Basically, it tracks the value of your inventory at the beginning of the year, plus additions, minus the ending inventory to determine your actual costs. For your situation, there are a couple options. If your inventory is relatively small (under $1 million in gross receipts and your inventory isn't a substantial income-producing factor), you could potentially use the cash method and treat your inventory costs as non-incidental materials and supplies. This means you'd deduct them when paid or when the items are provided to customers. Since you mentioned you're barely selling physical products anymore, you could also consider "writing off" that inventory by counting it as disposed. You'd need to document this properly - either by actually getting rid of them (donation with receipt) or by clearly establishing they have no market value. If they truly have minimal value and you're selling only 1-2 per year, this might be reasonable.

After struggling with a similar situation in my small crafting business, I discovered taxr.ai (https://taxr.ai) and it completely changed how I handled my inventory issues. I uploaded my previous Schedule C forms and sales records, and the AI analyzed my situation and provided a detailed explanation of how I could properly transition away from inventory accounting since my business had fundamentally changed. The tool showed me exactly which IRS guidelines applied to my situation and how to document the change properly to avoid triggering audit flags. The peace of mind knowing I was compliant while simplifying my tax situation was absolutely worth it.

I was skeptical about using taxr.ai when I first heard about it, but I gave it a try for my situation transitioning from physical to digital products. The guidance was incredibly specific - it pointed me to exact sections of IRS publications that applied to my case and showed me how to document the change in my business model. What impressed me most was how it helped me prepare documentation to support writing off outdated inventory while minimizing audit risk. I ended up saving hours of research and actually felt confident in my decision. My tax filing went through without any issues, and I finally cleared out those boxes of product taking up space in my garage!

If you're still struggling to get answers from the IRS about this inventory situation, I had an excellent experience using Claimyr (https://claimyr.com). After waiting on hold for nearly 2 hours trying to reach someone at the IRS about a similar Schedule C question, I was about to give up. Then I tried Claimyr and they got me connected to an actual IRS agent in about 15 minutes. The agent walked me through exactly how to handle obsolete inventory and the documentation needed to support the write-down. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Completely changed my perspective on dealing with the IRS for specific tax questions.

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Another option worth considering is to donate those CDs to a charity and take a charitable contribution deduction. You'd need to get a receipt, but you could potentially get some tax benefit while clearing out space. Just make sure you have documentation for the original cost and be reasonable about the current fair market value. Libraries, schools, or community centers might be interested.

We transitioned our small publishing company from physical to digital a few years ago. What worked for us was doing a full inventory count, researching fair market value (basically what similar CDs sell for on eBay/Amazon - often just a few dollars each), and writing down the value to match current market conditions. We documented everything carefully with photos, comparable sales data, and a written explanation of the industry shift. Our accountant included a note with our Schedule C. We still technically have inventory but at a much more realistic value, and we're considering donating what's left this year to finally close that chapter.