Help CenterAccounting for inventory is necessary to reflect gross profit when the production, purchase, or sale of merchandise is an income-producing factor. However, if an inventory is necessary to account for your income, you generally must use and accrual method of accounting for sales and purchases, unless you are a small business taxpayer.
Small business taxpayer. You are a small business taxpayer if you have average annual gross receipts of $26 million (2021) or less for the prior three tax years and are not a tax shelter.
Method of accounting. All taxpayers must use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you will not be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial statement treatment of all inventories.
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