Unsold Inventory and Cost of Goods: What You Can Deduct This Year

The rule in one line

Publication 334 says that if you buy goods to sell, you deduct the cost of goods sold from your gross receipts on Schedule C. To figure that cost, you value your inventory at the beginning and end of each tax year. The Schedule C instructions add that, in most cases, a business where buying and selling merchandise produces income must take inventories into account.

The arithmetic lives in Schedule C, Part III:

Worked example: $3,000 bought, half sold

A seller’s first year, 2026:

• Paid $3,000.00 for items to resell, including the sales tax at the register. Pub 334 says sales tax on merchandise bought for resale is part of its cost.
• Kept one jacket that cost $60.00 for personal use. Pub 334 says items withdrawn for personal or family use come out of purchases.
• Paid $120.00 of shipping to receive an online lot (the liquidation pallet guide spreads a lot’s landed cost over the units that sell). Pub 334 says freight-in on merchandise bought for sale is part of cost of goods sold.
• By December 31, sold the items that made up half of the remaining cost. The unsold half, with its share of the freight, is counted at cost.

The answer to “what do I deduct?” is $1,530.00 of cost of goods sold for 2026, not $3,060.00. The other $1,530.00 isn’t lost. It becomes line 35, beginning inventory, on the 2027 Schedule C. If the rest sells in 2027 with no new buying, 2027’s cost of goods sold is that $1,530.00. Across the two years, the full $3,060.00 is deducted, each part in the year its items sold.

Our profit calculator applies the same idea to one item. In its default example, a $12.00 thrift find plus $0.96 of sales tax paid when buying it is a $12.96 cost, and that’s the amount that counts when the item sells. The calculator’s return on investment uses it: $22.71 profit on an eBay sale ÷ $12.96 = 175.2%.

What counts as cost, and what doesn’t

From Pub 334 and the Schedule C instructions:

• The price you actually paid. Trade discounts come off the price, returns to the supplier come off purchases, and sales tax on items for resale is part of their cost.
• Freight-in. Shipping you pay to receive inventory belongs in cost of goods sold.
• Not personal-use items. Anything you pull from stock for yourself or your family comes out of purchases.
• Ending inventory at cost. The Schedule C instructions allow cost, the lower of cost or market, or another IRS-approved method (line 33).

Other selling costs, such as platform fees and the labels you buy to ship orders, aren’t part of cost of goods sold; they’re business expenses in Part II of Schedule C. Pub 334 says containers and packages that aren’t an integral part of a manufactured product are shipping or selling expenses; mailers and boxes you ship orders in look like that second kind, but confirm with a tax professional.

The small business exception

The Schedule C instructions and Pub 334 let a small business taxpayer choose not to keep an inventory. That’s a business with average annual gross receipts of $31 million or less for the three prior tax years (indexed for inflation) that isn’t a tax shelter. That’s the figure printed for 2025 returns. For tax years beginning in 2026, Rev. Proc. 2025-32 sets the inflation-adjusted gross receipts test of section 448(c) at $32,000,000.

Skipping a formal inventory doesn’t mean deducting everything at purchase. The two methods the IRS names are:

1. Treat inventory as non-incidental materials and supplies. Pub 334 says you then deduct the cost in the year the items are first used or consumed. It adds that inventory is used or consumed in the year you provide it to your customers. In the example, that’s still the cost of the half that sold.
2. Follow your financial accounting treatment, meaning the method used in your books and records.

Changing an inventory method generally means filing Form 3115, as the Schedule C instructions note. Ask a tax professional before you switch.

Records that support the numbers

Publication 583 describes inventory as any item you buy and resell. It says your documents should show the amount paid and that it was for inventory, such as canceled checks, cash register receipts, credit card slips and invoices. For a reseller, that usually means:

1. Thrift, store and online receipts, or card statements, for every sourcing purchase, with the sales tax visible.
2. A list of what was on hand on December 31 and what each item cost. Pub 334 suggests inventory forms that record the description, quantity, unit price and value.
3. A note of anything you pulled for personal use, at its cost.
4. Shipping receipts for inventory you had delivered.

Pub 583 says to keep records that support an item on a return until its period of limitations runs out. That’s generally 3 years, but 6 years if you leave out income of more than 25% of the gross income on the return. Records for property should be kept until the limitations period runs out for the year you dispose of it.

Next step

Put each item’s cost and sourcing tax into the reseller profit calculator to see what one sale really leaves you. The profit per item guide shows the full method, and the quarterly taxes guide shows what happens once your Schedule C has a profit.