If you buy items to resell, the most important number in your tax records is not sales. It is the cost of what you sold. That figure is what turns gross receipts into gross profit, and it is the number most small resellers reconstruct in a panic in March. This manual explains the structure the IRS uses for cost of goods sold and how to keep records that fill it in without guesswork. It is general information from IRS Publication 334, not tax advice. Inventory rules have exceptions and elections, so read the current publication or work with a tax professional.
The structure on Schedule C
IRS Publication 334, the Tax Guide for Small Business, walks through figuring cost of goods sold on Schedule C, lines 35 through 42. Those line numbers come from Publication 334 (2025), which covers the 2025 tax year (returns filed in 2026); check the 2026 edition and form before relying on them. The headings tell the story:
- Line 35, inventory at beginning of year.
- Line 36, purchases less cost of items withdrawn for personal use.
- Line 37, cost of labor.
- Line 38, materials and supplies.
- Line 39, other costs, which the publication discusses including containers, freight-in and overhead.
- Line 40, add lines 35 through 39.
- Line 41, inventory at end of year.
- Line 42, cost of goods sold, which is line 40 minus line 41.
In words: what you had at the start, plus what you added, minus what you still have at the end, equals what you sold. Publication 334 then explains figuring gross profit by subtracting cost of goods sold from net receipts.
What that means for a small reseller
Most solo resellers have no labor line and few materials, so the working pieces are inventory and purchases.
- Beginning inventory is the value of unsold stock carried in from last year. If this is your first year, it is zero.
- Purchases are what you paid for items bought to resell this year. Publication 334 discusses adjustments such as trade and cash discounts, purchase returns, and merchandise withdrawn from sale. If you take an item out of stock and keep it, its cost comes out of purchases.
- Other costs can include costs of getting the goods to you. The publication's headings mention freight-in and containers. How shipping to buyers, packaging and platform fees are treated is a separate question; many sellers record them as business expenses rather than in cost of goods sold. Check the publication for the treatment that fits your situation.
- Ending inventory is the value of unsold stock on the last day of the year.
The small business taxpayer exception
Publication 334's inventory chapter includes a section on an exception for small business taxpayers and the option of treating inventory as non-incidental materials and supplies, or following financial accounting treatment. Whether you qualify and which method suits you depends on your gross receipts and your accounting method. This is the single most useful topic to read in the current publication, or to ask a tax professional about, before you set up your records. Once chosen, a method generally needs to be applied consistently, and the publication explains how changes in accounting method work.
Records that fill in the lines
The structure only works if each item has a cost attached. A simple system:
- An ID per item or lot. Write it on the tag or bag and in your sheet.
- Purchase cost. The price you paid, plus any buyer's premium, plus sales tax you paid on the purchase. Keep the receipt, or for yard sales a dated note with the seller location and amount.
- Lot allocation. When you buy a box for one price, split the cost across items in a consistent way, such as equally, or in proportion to expected sale price, and write down the method. The where to source manual mentions this for bundles.
- Status. In stock, listed, sold, donated, pulled for personal use, or discarded.
- Sale record. Date, platform, price, fees, shipping charged and paid.
At year end, filter for items still in stock. Their total cost is your ending inventory under a cost-based approach, and next year's beginning inventory.
Count once a year, at least
A physical count on the last day of the year catches the differences between your sheet and the shelf: items that sold without being marked, items that broke, items you forgot. Fix the sheet to match the shelf, and note why.
Damaged or unsellable items are worth a decision rather than a shrug. If something is discarded, record it. If you donate inventory, Publication 334 has a note on donation of inventory under the beginning inventory line. Read it before you assume a donation deduction.
How long to keep records
The IRS recordkeeping page explains that records supporting income and deductions should be kept as long as they may be needed for the administration of tax law, and links to its guidance on how long that is. Purchase receipts for inventory matter until the items are sold and the return for that year is past the relevant period.
Why this matters beyond taxes
The same records tell you which categories make money. If your cost of goods sold for a category is close to its sales after fees, that category is not working, no matter how fast it sells. Bring per-item costs to the profit bench and the fees and margins manual to see the full picture.
Can I deduct everything I bought for resale this year, even if it has not sold?
For a business that keeps inventory, cost of goods sold is figured from beginning inventory plus purchases and certain other costs, minus ending inventory, which is the structure IRS Publication 334 uses for Schedule C. Unsold stock at year end usually stays in inventory. Publication 334 also describes an exception for small business taxpayers; check the current publication or a tax professional for how it applies to you.