Inventory Tax Deductions 2026: Complete Guide for Product Sellers

Product sellers deduct inventory one of two ways in 2026, and which one you use turns on a single number: your average annual gross receipts. If they are at or below the $32 million small-business threshold (IRC §448(c), inflation-indexed for 2026), you can skip formal inventory accounting under §471(c) and deduct inventory the way your books already do, or treat it as non-incidental materials and supplies. Above $32 million, you must capitalize inventory and deduct it as cost of goods sold (COGS) only when the item actually sells. Picking the right method is often worth tens of thousands of dollars in accelerated deductions and cash flow.

Key takeaways:

• 2026 small-business threshold: $32,000,000 average annual gross receipts over the prior 3 years (IRC §448(c); it was $30M in 2024 and $31M in 2025). At or under it, §471(c) exempts you from the general inventory rules and from UNICAP (§263A).
• Two simplified §471(c) options: (1) follow your books-and-records method, which for a cash-basis seller can deduct inventory when paid; (2) treat inventory as non-incidental materials and supplies (NIMS), deductible when the item is provided to the customer or when paid, whichever is later.
• COGS timing (over $32M, or if you keep formal inventory records): beginning inventory + purchases − ending inventory, deducted only for goods actually sold, reported on Schedule C Part III (Lines 35–42) or Form 1125-A.
• Valuation methods: FIFO, LIFO (needs Form 970 and follows the LIFO conformity rule), average cost, or specific identification.
• Changing methods requires IRS Form 3115 and a §481(a) adjustment.

---

Executive Summary: Inventory Deduction Options

Three Ways to Deduct Inventory in 2026:

Option 1: Books-Conformity Method (Cash-Method Sellers)

• Best for: Cash-method businesses at or under $32M that expense inventory in their own books
• Deduction: When paid, if your books-and-records method expenses inventory when purchased
• Requirement: Don't keep inventory records for cost allocation or creditor reports
• Advantage: Simplest method, best cash flow

Option 2: Nonincidental Materials & Supplies (NIMS)

• Best for: Manufacturers and fabricators who want out of UNICAP and full inventory accounting
• Deduction: When the item is provided to the customer (sold) or when paid, whichever is later
• Requirement: Gross receipts at or under $32M
• Advantage: Simpler records than COGS; direct materials only, with labor and overhead deducted currently; no UNICAP

Option 3: Traditional Inventory Method (COGS)

• Best for: Businesses over $32M or with complex inventory needs
• Deduction: Only when inventory is sold
• Accounting methods: FIFO, LIFO, Average Cost, Specific Identification
• Advantage: Matches revenue with expenses

Key Threshold for 2026:

• $32,000,000 in average annual gross receipts over the prior 3 years (IRC §448(c), indexed for inflation)
• At or under $32M = eligible for the simplified §471(c) methods
• Over $32M = must use traditional inventory accounting and UNICAP

---

What Is Inventory? Understanding the Basics

Inventory Definition

Inventory (merchandise) includes goods and products that a business owns to sell to customers in the ordinary course of business.

What counts as inventory:

• ✅ Finished goods ready for sale
• ✅ Work-in-process (partially finished goods)
• ✅ Raw materials and components
• ✅ Goods you've purchased but not yet received (if you own title)
• ✅ Goods on consignment that you own
• ✅ Goods in transit that you own

What is NOT inventory:

• ❌ Equipment, tools, and machinery used in your business
• ❌ Office supplies
• ❌ Goods you're holding on consignment (but don't own)
• ❌ Real estate
• ❌ Materials and supplies that don't become part of finished products

Legal Citation: IRS Publication 334, Chapter 7 - Inventory

---

What Is NOT Inventory: Materials, Supplies, and Assets

Materials and Supplies

Not counted as inventory:

• Parts for maintaining/repairing equipment
• Fuel, lubricants, and consumables (used within 12 months)
• Items with useful life of 12 months or less
• Items costing $200 or less

Tax Treatment:

• Deduct when used or consumed (not when purchased)
• Exception: "Incidental supplies" can be deducted when purchased if:
  • You don't track usage
  • You don't take physical inventory counts
  • Deducting when purchased doesn't distort income

Long-Term Assets

Examples:

• Equipment and machinery
• Tools
• Office furniture
• Vehicles
• Buildings

Tax Treatment:

• NOT part of inventory
• Deducted via Section 179, bonus depreciation, or regular depreciation
• (See our Section 179 & Depreciation Guide)

---

The $32 Million Small-Business Threshold (2026): Why It Matters

Historical Context

Before 2018:

• ALL businesses (regardless of size) had to maintain inventory
• Deduct inventory ONLY when sold (not when purchased)
• Complex uniform capitalization (UNICAP) rules applied
• Cash method of accounting prohibited for most inventory businesses

After 2018 (Tax Cuts and Jobs Act):

• Small business taxpayers can use the cash method (see our cash vs. accrual accounting guide)
• Two simplified inventory options became available under §471(c)
• UNICAP rules don't apply to qualifying small businesses
• Earlier deductions = better cash flow

The size test is the §448(c) gross receipts threshold, and it is indexed for inflation each year: $30 million (2024), $31 million (2025), and $32 million (2026). For a 2026 tax year, "small business taxpayer" means average annual gross receipts of $32,000,000 or less over the 3 prior tax years.

Legal Citation: IRC § 471(c) - Exemption from inventory accounting for certain small business taxpayers; threshold set by IRC § 448(c) and indexed by Rev. Proc. 2025-32 for 2026

Calculating Your Average Annual Gross Receipts

Formula:

Average annual gross receipts = (Year 1 receipts + Year 2 receipts + Year 3 receipts) ÷ 3

Example:

Average: ($22M + $28M + $31M) ÷ 3 = $27,000,000

Result: Under the $32M threshold, so this business is eligible for the simplified inventory methods.

Important: You use the average over 3 years, not just the current year. So even if a single year exceeds $32M, you still qualify if the 3-year average is at or under $32M.

---

Option 1: Books-Conformity Method (Cash-Method Sellers)

How It Works

If your business is at or under the $32M threshold and uses the cash method of accounting, §471(c) lets you follow the inventory treatment in your own books and records. When those books expense inventory when purchased, you deduct it when you pay for it, as long as you don't maintain inventory records for cost allocation or creditor reporting. This is the non-financial-statement (non-AFS) books-conformity method under IRC §471(c)(1)(B)(ii).

Requirements:

1. Gross receipts at or under $32M (3-year average)
2. Use cash method of accounting
3. Your books and records expense inventory when purchased and don't:
   • Allocate costs to ending inventory
   • Calculate COGS
   • Report inventory value to banks/creditors

What you CAN do:

• ✅ Track inventory for reordering purposes
• ✅ Use point-of-sale systems for sales tracking
• ✅ Monitor stock levels for operations

What you CANNOT do (if you want immediate deduction):

• ❌ Take physical inventory counts for financial reporting
• ❌ Allocate costs between sold and unsold inventory
• ❌ Report inventory value to lenders
• ❌ Calculate year-end inventory value in your books

Legal Citation: IRC § 471(c)(1)(B)(ii) and Reg. § 1.471-1(b) - inventory method conforming to a small business taxpayer's books and records

Example 1: Qualifies for Immediate Deduction

Scenario:

Tax Treatment:

Result: Full immediate deduction.

Why it qualifies:

• Uses inventory tracking ONLY for reordering
• Doesn't allocate costs to ending inventory
• Doesn't report inventory value to creditors
• Cash method in books matches tax method

---

Example 2: Does NOT Qualify for Immediate Deduction

Scenario:

Tax Treatment:

Result: You can only deduct what was sold.

Why it doesn't qualify:

• Takes physical counts for financial reporting
• Reports inventory value to creditors
• Allocates costs between sold and unsold inventory
• Must use traditional COGS method

---

Option 2: Nonincidental Materials & Supplies (NIMS) Method

How It Works

Businesses at or under the $32M threshold can elect to treat inventory as non-incidental materials and supplies (NIMS) under §471(c). Under the final regulations (T.D. 9942), NIMS inventory is recovered through cost of goods sold in the year the item is provided to the customer (when it sells) or the year you pay for or incur the cost, whichever is later.

Common misconception: NIMS does not let a manufacturer deduct raw materials the moment they move into production. The IRS confirmed in the final small business taxpayer regulations that raw materials converted to work-in-process or finished goods, but not yet sold, are not "used or consumed" for this purpose. So NIMS timing lands close to traditional COGS.

The real advantage is simpler recordkeeping, not earlier timing:

• Only direct material cost (or purchase cost for resale) is included in the NIMS amount
• Direct labor and indirect overhead are deducted in the year paid or incurred, not capitalized into inventory
• UNICAP (§263A) does not apply

Who benefits most:

• Manufacturers and custom fabricators who want out of UNICAP and full inventory accounting
• Businesses with significant direct labor and overhead they can now deduct currently

Legal Citation: IRC § 471(c)(1)(B)(i) and Reg. § 1.471-1(b) - non-incidental materials and supplies method

Manufacturing Example

Scenario: A custom furniture manufacturer with $22M in gross receipts buys $800,000 in lumber and hardware in December 2026, moves it into production in January 2027, and sells the finished furniture in March 2027.

Under the NIMS method, the $800,000 direct material cost is recovered through COGS in March 2027, when the furniture is provided to the customer (or when paid, if that is later). The timing matches traditional COGS. What changes is that the manufacturer deducts its direct labor and factory overhead in the year incurred and skips UNICAP, which simplifies the books and accelerates those non-material deductions.

---

Option 3: Traditional Inventory Method (COGS)

When You Must Use This Method

Required if:

• ✅ Gross receipts exceed $32M (3-year average)
• ✅ You want to match revenue with expenses precisely
• ✅ You report inventory to creditors or for financial statements
• ✅ You take physical inventory counts

Cost of Goods Sold (COGS) Formula

Standard COGS calculation:

Example:

COGS = $500,000 + $2,000,000 - $400,000 = $2,100,000 (deductible in 2026)

Tax Treatment:

• COGS is deducted on Schedule C Line 4 (calculated in Part III, Lines 35–42)
• Reduces gross income
• Only sold inventory is deductible
• Unsold inventory remains an asset on your balance sheet

To see how COGS changes your profitability, run the numbers through our gross margin calculator.

---

Inventory Accounting Methods: FIFO, LIFO, Average Cost

Choosing Your Inventory Valuation Method

When you maintain traditional inventory, you must choose an accounting method to value your ending inventory. This choice affects your COGS and taxable income.

---

Method 1: FIFO (First-In, First-Out)

Assumption: The first items purchased are the first items sold

How it works:

December: sell 150 units.

FIFO assumes you sold:

• 100 units from January @ $10 = $1,000
• 50 units from June @ $12 = $600
• COGS = $1,600

Ending inventory: 50 units from June @ $12 = $600

Advantages:

• ✅ Reflects actual physical inventory flow (for most businesses)
• ✅ Higher ending inventory value in inflationary times
• ✅ Simpler to calculate and explain
• ✅ No IRS approval needed to adopt

Disadvantages:

• ❌ Higher taxable income during inflation (older, cheaper costs matched against current revenue)
• ❌ Higher taxes paid sooner

Best for:

• Perishable goods businesses
• Businesses experiencing stable or declining prices
• Businesses wanting to show higher profits to lenders

---

Method 2: LIFO (Last-In, First-Out)

Assumption: The last items purchased are the first items sold

How it works:

December: sell 150 units.

LIFO assumes you sold:

• 100 units from June @ $12 = $1,200
• 50 units from January @ $10 = $500
• COGS = $1,700

Ending inventory: 50 units from January @ $10 = $500

Advantages:

• ✅ Matches current costs with current revenue
• ✅ Lower taxable income during inflation
• ✅ Tax deferral (pay taxes later)
• ✅ Better cash flow

Disadvantages:

• ❌ More complex to calculate
• ❌ Requires IRS Form 970 and special election
• ❌ Must use LIFO for financial statements too (LIFO conformity rule)
• ❌ Lower ending inventory value
• ❌ May reduce borrowing capacity (lower assets)

Legal Citation: IRC § 472 - Last-in, first-out inventories

Best for:

• Businesses with rising costs
• High-volume commodity businesses
• Businesses prioritizing tax minimization over financial statement profit

---

Method 3: Average Cost (Weighted Average)

Assumption: All units have the same average cost

How it works:

Average cost = $2,200 ÷ 200 = $11 per unit

December: sell 150 units, so COGS = 150 × $11 = $1,650

Ending inventory: 50 units × $11 = $550

Advantages:

• ✅ Simple to calculate
• ✅ Smooths out price fluctuations
• ✅ Reduces record-keeping complexity
• ✅ No IRS approval required

Disadvantages:

• ❌ Doesn't match actual physical flow
• ❌ Moderate tax impact (between FIFO and LIFO)

Best for:

• Businesses with many similar items
• Businesses with stable prices
• Businesses wanting simple administration

---

Method 4: Specific Identification

Assumption: Track the actual cost of each specific item sold

How it works:

Sell Item #2, so COGS = $150 (the actual cost of that specific item).

Advantages:

• ✅ Most accurate matching of costs to revenue
• ✅ Works for unique, high-value items

Disadvantages:

• ❌ Extremely labor-intensive
• ❌ Only practical for limited inventory types
• ❌ Allows manipulation (cherry-picking which items to sell)

Best for:

• Car dealerships
• Jewelry stores
• Art galleries
• Custom equipment sellers
• Real estate developers

---

Comparative Example: FIFO vs. LIFO Tax Impact

Scenario

Purchases during the year:

Total goods available for sale: $860,000. Units sold: 1,800. Sales revenue: $5,000,000.

FIFO Method

COGS (first 1,800 units):

Ending inventory (200 units from Q4): 200 × $260 = $52,000

Gross profit: $5,000,000 - $610,000 = $4,390,000

LIFO Method

COGS (last 1,800 units):

COGS = $420,000 + $400,000 (from beginning inventory) = $820,000

Ending inventory (200 units from Q1): 200 × $200 = $40,000

Gross profit: $5,000,000 - $820,000 = $4,180,000

Tax Comparison

Conclusion: LIFO saves $73,500 in taxes during inflationary periods by matching higher recent costs against current revenue.

---

Physical Inventory Counts: Requirements and Best Practices

Why Physical Counts Matter

Even if you use computerized tracking, the IRS requires periodic physical inventory verification to ensure accuracy.

When physical counts are required:

• At least annually (typically December 31)
• When starting to maintain inventory
• When changing inventory methods
• During IRS audits

How to Conduct a Physical Count

Step 1: Plan the count

• Choose a date (usually year-end)
• Assign count teams
• Prepare count sheets or use mobile apps
• Organize inventory by category/location

Step 2: Perform the count

• Count every item in inventory
• Record quantities and item descriptions
• Use two-person teams for accuracy
• Tag counted items to avoid duplication

Step 3: Value the inventory

• Apply unit costs based on your method (FIFO, LIFO, etc.)
• Calculate total value
• Compare to computerized records
• Investigate significant variances

Step 4: Adjust your books

• Adjust for shrinkage (theft, damage, errors)
• Update inventory accounts
• Document all adjustments
• File supporting documentation

Common Inventory Adjustments

Legal Citation: IRS Publication 538 - Accounting Periods and Methods

---

Changing Your Inventory Accounting Method

When You Need IRS Permission

IRS Form 3115 required when:

• Switching from accrual to cash method
• Changing from FIFO to LIFO (or vice versa)
• Starting to use materials & supplies method
• Changing from one LIFO method to another

When no permission needed:

• First year of business (choose any method)
• Within same method class (e.g., different FIFO variations)

Form 3115: Application for Change in Accounting Method

Key Information Required:

1. Current accounting method
2. Proposed accounting method
3. Reason for change
4. Section 481(a) adjustment calculation

Section 481(a) Adjustment:

• Ensures you don't double-deduct or omit income
• Typically spread over 4 years (if positive adjustment)
• Immediate deduction (if negative adjustment)

Example:

You switch from the accrual method to the cash method.

• Accrual method: $800,000 in unsold inventory (not yet deducted)
• Cash method: deduct when purchased
• Section 481(a) adjustment: +$800,000 (deduction)
• Spread over 4 years: $200,000 per year additional deduction

Legal Citation: Rev. Proc. 2018-40 - Simplified procedures for changing accounting methods

Important: Form 3115 is complex. Strongly recommend working with a tax professional.

---

Special Situations and Advanced Topics

Manufacturing: Uniform Capitalization (UNICAP) Rules

Who it applies to:

• Manufacturers with gross receipts over $32M
• Businesses producing or reselling inventory

What it requires:

• Allocate indirect costs to inventory
• Include overhead, storage, handling, repackaging
• Can't deduct these costs until inventory is sold

Who is EXEMPT:

• Small business taxpayers at or under $32M (since 2018, threshold indexed each year)
• Retailers and wholesalers at or under $32M

Legal Citation: IRC § 263A - Capitalization and inclusion in inventory costs of certain expenses

---

Obsolete and Damaged Inventory

When can you write off inventory?

Obsolete inventory:

• Outdated products with no market value
• Write down to fair market value or zero
• Must document decline in value
• Deduct as business loss

Damaged inventory:

• Calculate salvage value or scrap value
• Write down to salvage value
• Deduct the difference as loss

Spoiled/expired inventory:

• Perishable goods past expiration
• Write off completely
• Document with photos and disposal records

Example:

Documentation required:

• Photos of damaged/obsolete goods
• Vendor statements (if applicable)
• Disposal records
• Valuation reports (for large write-offs)

---

Consignment Inventory

Goods you own but are held by others:

• ✅ Include in YOUR inventory
• Calculate COGS when consignee sells the items
• You own title until sale occurs

Goods you hold for others (consignment sales):

• ❌ NOT in your inventory
• You don't own the goods
• Commission income only when sold

---

Goods in Transit

Determining ownership:

FOB (Free on Board) Shipping Point:

• Buyer owns goods once they leave seller's location
• Buyer includes in inventory during transit

FOB Destination:

• Seller owns goods until they reach buyer
• Seller includes in inventory during transit

Example:

You purchase $100,000 in inventory on December 28, 2026. Terms: FOB shipping point. Goods arrive January 3, 2027.

Result: Include it in your December 31, 2026 inventory (you owned the goods on Dec 31).

---

Tax Reporting: Forms and Schedules

Schedule C (Sole Proprietors)

Cost of Goods Sold section (Part III):

• Line 35: Inventory at beginning of year
• Line 36: Purchases
• Line 37: Cost of labor
• Line 38: Materials and supplies
• Line 39: Other costs
• Line 40: Add lines 35-39
• Line 41: Inventory at end of year
• Line 42: Cost of Goods Sold (Line 40 minus Line 41)

Inventory method question:

• Must specify method used (FIFO, LIFO, Average Cost, etc.)
• Consistent method required year-to-year

---

Form 1125-A (Partnerships, S-Corps, C-Corps)

Cost of Goods Sold form:

• More detailed than Schedule C
• Required for all business entities
• Includes inventory valuation method
• Section 263A (UNICAP) information

What to report:

1. Beginning and ending inventory
2. Purchases
3. Labor costs
4. Materials and supplies
5. Other costs
6. Inventory valuation method
7. Writedowns of subnormal goods

---

Common Mistakes and How to Avoid Them

Mistake #1: Not Knowing About the $32M Exception

❌ Problem: Business with $15M in receipts continues using accrual method and traditional COGS

Consequences:

• Delayed deductions (only when inventory sells)
• Missed opportunity for immediate deduction
• Worse cash flow

✅ Solution:

• Calculate your 3-year average gross receipts
• If at or under $32M, consider switching to cash method
• File Form 3115 to change methods
• Potentially deduct unsold inventory immediately

Potential savings: $50,000+ in accelerated deductions for businesses with substantial inventory

---

Mistake #2: Mixing Inventory Tracking Methods

❌ Problem: Using cash method in QuickBooks but taking physical inventory counts for bank reports

Consequences:

• IRS will require you to use traditional COGS method
• Lose immediate deduction eligibility
• Must recalculate taxes for prior years

✅ Solution:

• Use inventory tracking ONLY for reordering
• Don't report inventory values to creditors
• Don't perform year-end physical counts for financial reporting
• Expense inventory when purchased in your books

---

Mistake #3: Not Documenting Inventory Method Choice

❌ Problem: No documentation of which method you're using (FIFO vs LIFO)

Consequences:

• IRS can impose its own method
• Inconsistent year-to-year treatment
• Audit adjustments and penalties

✅ Solution:

• Document your inventory method choice in writing
• File Form 970 if electing LIFO
• Use the same method consistently
• Keep detailed records

---

Mistake #4: Forgetting Section 481(a) Adjustment

❌ Problem: Switching from accrual to cash method without Section 481(a) adjustment

Consequences:

• Double-deduct or miss deductions
• IRS adjustments
• Penalties and interest

✅ Solution:

• Always calculate Section 481(a) adjustment when changing methods
• Work with tax professional on Form 3115
• Track adjustment over 4-year period

---

Mistake #5: Not Writing Off Obsolete Inventory

❌ Problem: Keeping unsellable inventory on books at original cost

Consequences:

• Overstated inventory value
• Overstated assets
• Missing legitimate deduction
• Higher taxes

✅ Solution:

• Regularly review inventory for obsolescence
• Document market value decline
• Write down to fair market value
• Photograph and dispose of worthless inventory
• Deduct the loss

---

Inventory and COGS Tracking: How Jupid Helps

Choosing an inventory method is a tax decision, but getting the numbers right is bookkeeping. Jupid connects your bank and categorizes every purchase at 95.9% accuracy, so inventory buys, freight, and supplies are tagged and ready when you compute cost of goods sold. Instead of digging through spreadsheets at year-end, ask your AI accountant in WhatsApp or iMessage "how much did I spend on inventory this quarter?" or "which purchases count toward COGS?" and get an answer with the underlying transactions linked. That keeps your beginning inventory, purchases, and ending inventory reconciled all year, whether you deduct under the §471(c) small business rules or traditional COGS.

Try Jupid

---

Action Checklist: Optimizing Your Inventory Deductions

Before Year-End

• Calculate your 3-year average gross receipts
• Determine if you're at or under the $32M threshold
• Review your current inventory accounting method
• Decide if you should change methods (file Form 3115 if needed)
• Review inventory for obsolete/damaged items
• Plan year-end purchases strategically

At Year-End

• Conduct physical inventory count (if required)
• Calculate ending inventory value
• Write off obsolete/damaged inventory
• Reconcile physical count with records
• Calculate Cost of Goods Sold
• Document inventory method used

When Filing Taxes

• Complete Schedule C Part III or Form 1125-A
• Report correct inventory method
• Include beginning and ending inventory
• Calculate COGS correctly
• File Form 3115 if changing methods
• Calculate Section 481(a) adjustment if applicable

Throughout the Year

• Track all inventory purchases
• Monitor inventory levels
• Review for obsolescence quarterly
• Maintain consistent accounting method
• Keep detailed purchase records
• Document any inventory losses

---

Resources and Citations

IRS Publications (Official Sources)

• IRS Publication 334 - Tax Guide for Small Business (Chapter 7: Inventory)
• IRS Publication 538 - Accounting Periods and Methods
• Form 1125-A - Cost of Goods Sold
• Form 3115 - Application for Change in Accounting Method
• Form 970 - Application to Use LIFO Inventory Method

Tax Code and Regulations

• IRC § 471 - General rule for inventories
• IRC § 471(c) - Exemption from inventory accounting for certain small business taxpayers
• IRC § 448(c) - Gross receipts test ($32,000,000 for 2026, indexed)
• IRC § 472 - Last-in, first-out inventories
• IRC § 263A - Capitalization and inclusion in inventory costs of certain expenses (UNICAP)
• IRS Reg. 1.471-1 - Need for inventories
• IRS Reg. 1.471-1(b) - Inventory rules for small business taxpayers (books-conformity and NIMS methods)
• IRS Reg. 1.162-3 - Materials and supplies
• T.D. 9942 - Final small business taxpayer regulations (Jan 2021)

Revenue Procedures

• Rev. Proc. 2018-40 - Simplified procedures for changing accounting methods under IRC § 471(c)
• Rev. Proc. 2025-32 - 2026 inflation adjustments, including the IRC § 448(c) $32,000,000 gross receipts threshold

---

Final Thoughts

Inventory tax deductions are one of the most overlooked opportunities for product-based businesses. Since the 2018 tax law changes, small business taxpayers at or under the $32M gross receipts threshold can drop formal inventory accounting under §471(c), which for a cash-method seller can free up cash flow that used to be tied up in unsold inventory.

The key is understanding your options:

• Books-conformity method for cash-method sellers (deduct inventory when paid)
• Non-incidental materials & supplies (deduct when the item sells or when paid, whichever is later; no UNICAP)
• Traditional COGS with FIFO, LIFO, or Average Cost

Your choice depends on:

• Your gross receipts (above or below $32M)
• Whether you manufacture or resell goods
• Your need for financial statement reporting
• Your cash flow priorities
• Current economic conditions (inflation/deflation)

Remember: If you're at or under $32M and still using the accrual method with traditional COGS, you may be paying tax on inventory you haven't sold yet. A cash-method, books-conformity election can be one of the most valuable planning moves you make this year, but it requires Form 3115 and a §481(a) adjustment, so run it past a tax professional first.

---

Disclaimer

This article provides general information about tax deductions and should not be considered tax advice. Tax laws change frequently, and individual circumstances vary significantly. Inventory accounting method changes require careful analysis and IRS Form 3115 filing. For advice specific to your situation, consult with a qualified tax professional.

Tax Year: 2026 Last Updated: July 7, 2026