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IRS.gov Website
Instructions for Schedule C (Form 1040)
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2314

Part III. Cost of Goods Sold(p14)

For Use in Tax Year 2013
rule
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.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2328
Exception for certain taxpayers.(p14)
For Use in Tax Year 2013
rule
If you are a qualifying taxpayer or a qualifying small business taxpayer (discussed next), you can account for inventoriable items in the same manner as materials and supplies that are not incidental. Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the year you paid for the raw materials or merchandise, if you are also using the cash method). Enter amounts paid for all raw materials and merchandise during 2013 on line 36. The amount you can deduct for 2013 is figured on line 42.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2345
Qualifying taxpayer.(p14)
This is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $1 million or less, and (b) whose business is not a tax shelter (as defined in section 448(d)(3)).
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2361
Qualifying small business taxpayer.(p14)
This is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $10 million or less, (b) whose business is not a tax shelter (as defined in section 448(d)(3)), and (c) whose principal business activity is not an ineligible activity as explained in Rev. Proc. 2002-28. You can find Rev. Proc. 2002-28 on page 815 of Internal Revenue Bulletin 2002-18 at www.irs.gov/pub/irs-irbs/irb02-18.pdf.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2384
Changing accounting methods.(p14)
File Form 3115 if you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2392
Additional information.(p14)
For additional guidance on this method of accounting for inventoriable items, see the following.
caution
Certain direct and indirect expenses may have to be capitalized or included in inventory. See Part II, earlier. See Pub. 538 for additional information.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2434

Line 33(p14)

For Use in Tax Year 2013
rule
Your inventories can be valued at cost, the lower of cost or market, or any other method approved by the IRS. However, you are required to use cost if you are using the cash method of accounting.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2450

Line 35(p14)

For Use in Tax Year 2013
rule
If you are changing your method of accounting beginning with 2013, 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.
taxmap/instr/i1040sc-012.htm#en_us_publink24329wd0e2468

Line 41(p14)

For Use in Tax Year 2013
rule
If you account for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 41 the portion of your raw materials and merchandise purchased for resale that is included on line 40 and was not sold during the year.