Part III. Cost of Goods Sold

In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year.

Exception for small business taxpayers. If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as nonincidental material or supplies or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally value the inventory each

Line 33 Your inventories can be valued at cost, the lower of cost or market, or any other method approved by the IRS.

Line 33 doesn’t apply to filers of Form 1040-SS.

Line 35 If you are changing your method of accounting beginning with 2025, refigure last year’s closing inventory using your new method of accounting and enter the result on line 35. If there is a difference between last year’s closing inventory and the refigured amount, attach an explanation and take it into account when figuring your section 481(a) adjustment. For details, see the example under Line F, earlier.