Cost of Goods Sold
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.
Exception for certain taxpayers. 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 2014 on line 36. The amount you can deduct for 2014 is figured on line 42.
Qualifying taxpayer. This is a taxpayer (a) whose average annual gross receipts for each tax year ending on or after December 17, 1998, are $1 million or less, and (b) whose business is not a tax shelter (as defined in section 448(d)(3)). To figure your average annual gross receipts for each tax year, add the gross receipts for that tax year and the 2 preceding tax years. Divide the total by three.
Schedule C Instructions