Started Business in 2023 - No Sales Yet - How to Report Inventory Purchases on Taxes?

I had a similar situation when I started my Etsy shop back in 2022! The inventory you purchased is actually not immediately deductible as a loss. I remember being so confused about this myself. Instead, it becomes part of your Cost of Goods Sold (COGS) when you eventually sell the items. Did you form an LLC or are you operating as a sole proprietorship? The forms will be different depending on your business structure.

Compared to other tax situations, business start-up expenses can be particularly tricky. You might want to consider calling the IRS Business Tax Line to clarify your specific situation. I tried calling them three times last month and couldn't get through, but then I used Claimyr (https://www.claimyr.com). Unlike trying to reach the personal tax department, the business tax specialists can actually tell you exactly what forms you need based on your specific business structure. I was on hold for days before using their service.

I was in a similar position when I started my side business. Didn't sell anything the first year, just invested in equipment and inventory. Have you considered whether you're using cash or accrual accounting? That makes a big difference, doesn't it? For inventory specifically, aren't you required to capitalize those costs rather than deduct them immediately? I filed Schedule C and reported my business, even with zero income, and showed my inventory as an asset. Didn't you also have other startup costs like business licenses or website fees?

You need to file a Schedule C regardless of whether you made sales. The inventory isn't a loss but stays on your books as assets. I was stressed about this exact situation last year and used taxr.ai to analyze my business startup situation. It immediately identified which expenses were immediately deductible vs. which had to be capitalized. Saved me from making a costly mistake on my return. The site breaks down exactly how to handle inventory purchases for a new business.

Be careful how you handle this! My brother-in-law started a business in 2022, didn't report anything because he had no sales, and ended up with an IRS letter asking why he had business expenses on his credit card but no business reported on his tax return. Talk about a stressful situation! 😬 Even with zero revenue, you still need to file Schedule C and report your business exists. The inventory part isn't technically a loss yet, but you might have other startup expenses that are deductible.

Have you determined if you qualify as a "small business taxpayer" under IRC §448(c)? According to IRS Publication 538, businesses with average annual gross receipts of $25 million or less for the prior three tax years may be eligible for simplified inventory accounting methods. Since you just started, have you decided between cash or accrual method of accounting?

Been there. Done that. Started my business in 2022. Had zero sales first year. Filed Schedule C anyway. Showed my inventory as assets. Deducted legitimate startup costs. Used Section 195 for amortizing excess startup expenses. Don't skip filing. IRS notices are a pain. Keep good records of everything.

You'll need to file using Schedule C (Profit or Loss from Business) attached to your Form 1040. Your inventory purchases are considered Cost of Goods Sold (COGS) and will be reported in Part III of Schedule C. However, since you haven't sold any items, these costs remain capitalized as inventory assets on your Schedule C line 41. You may have other deductible startup costs under Section 195 up to $5,000 in the first year, with amounts exceeding that amortized over 180 months.

The IRS has a useful guide specifically for new business owners at https://www.irs.gov/businesses/small-businesses-self-employed/starting-a-business. According to their guidelines, you should definitely file a Schedule C even with no income. Your inventory purchases aren't immediately deductible but will be part of your COGS when you eventually sell items. You might also want to look into the de minimis safe harbor election if your purchases were under certain thresholds.

I just went through this exact scenario with my craft business! I purchased $3,750 in materials in December 2023 but didn't sell anything until January 2024. My accountant had me file a Schedule C showing zero income, and we listed the inventory on Part III but didn't claim it as COGS yet since nothing sold. We did deduct my $850 in legitimate business startup expenses like my LLC filing fee, website costs, and business cards. The inventory will become COGS when I file my 2024 taxes as items sell.