Year-End Inventory Count for Taxes: A December Plan for the Number Schedule C Asks For

IRS Publication 538 gives the whole instruction in one sentence:

"You must take a physical inventory at reasonable intervals and the book amount for inventory must be adjusted to agree with the actual inventory." — IRS Publication 538, Accounting Periods and Methods (opens in new tab) (revised January 2022, the current edition as of this writing)

"Reasonable intervals" sounds relaxed. But if you keep an inventory, Schedule C asks for exactly one inventory figure you can't get any other way: your inventory at the end of the year, line 41 (opens in new tab). It's the last day of your tax year. For almost every sole proprietor, that's December 31. So the count that matters most is the one that lands on the one day nobody wants to spend in a cold garage.

The good news is that the count itself takes an afternoon. The mistakes happen in the weeks around it: counting things that don't belong, missing things that do, and letting a box of holiday gifts quietly become a tax deduction. Here's the calendar that avoids all three.

The short version:

• Early December: confirm you keep an inventory at all. Small businesses can choose not to, but the alternatives still need a year-end number of their own.
• Mid-December: decide what goes on the list. Consignment and booth stock count, and so do purchased goods in transit once title has passed to you. Tools and shipping boxes don't.
• December 29–30: draw a clean cutoff between this year's sales and next year's.
• December 31: count quantities only. Put damaged goods in their own pile.
• The first week of January: turn quantities into dollars, using the same method as last year.
• Mid-January: adjust your books to match the count, and pull personal-use items out of purchases.
• February: hand lines 33 through 42 to whoever prepares your return.

This post follows a hypothetical maker, Marisol, who pours soy candles in a converted one-car garage. She's composite, not a real seller, but her numbers are the kind that show up on a real return.

Early December: confirm you're counting at all

Before you buy a clipboard, check which inventory method you already use. It's the method on last year's return, and you don't switch it in December on a whim.

Publication 334 lets a small business taxpayer skip keeping an inventory. You qualify with average annual gross receipts of $31 million or less over the three prior tax years (IRS Publication 334 (opens in new tab), 2025 edition). For tax years beginning in 2026, the inflation-adjusted figure is $32 million (Rev. Proc. 2025-32, section .30 (opens in new tab)). A candle business clears that bar with some room to spare.

Skipping the inventory doesn't mean deducting every jar of wax the day you buy it, though. Publication 334 names two methods you can use instead:

1. Non-incidental materials and supplies. You deduct the cost "in the year in which they are first used or consumed in your operations," and the publication says that happens "in the year you provide the inventory to your customers." Unsold candles on December 31 haven't been provided to anyone, so you still need to know what's left.
2. Your financial accounting treatment. Your tax method follows the way your books already handle inventory. If your books track stock, so does your return.

Either way, the year-end question doesn't go away. It just changes its label.

If you do keep an inventory, Publication 334 says you generally must use an accrual method for it and "value the inventory each year to determine your cost of goods sold in Part III of Schedule C." That's where the rest of this calendar comes in.

Before you switch: changing how you account for inventory is a change in accounting method, and it generally involves Form 3115 (Publication 334 (opens in new tab)). If this year's count makes you want a different method, write that down as a question for your preparer, and count the way you've been counting.

Marisol has kept an inventory since her second year, so her December is booked.

Mid-December: decide what belongs on the list

This is the step that decides whether the count is right. Counting technique matters less than scope: a perfectly counted list that leaves out a consignment shelf is still wrong.

Publication 334 lists what goes into an inventory: merchandise or stock in trade, raw materials, work in process, finished products, and "supplies that physically become a part of the item intended for sale." Publication 538 then adds the cases where you own stock you can't see from your workbench.

Two rows need judgment. Whether title to a shipment has passed depends on the purchase terms, so ask your preparer about any large order that straddles the new year. And the consignment row means you'll need a count from each shop that holds your stock. Email them in the second week of December, not the first week of January.

Marisol has twenty-two candles at two shops and a crate of market stock that lives in her hatchback from November to February. Both are on her list now.

December 29–30: draw the cutoff line

A count is a snapshot, and a snapshot blurs if things are moving. The cutoff decides which side of midnight each item falls on.

• Ship or hold. If an order ships on the 30th, it's a sale this year and the candle is off the list. If it's paid but still on your bench on the 31st, it's still on your shelf, so count it. Whether it's also a sale this year is a question your books should answer the same way every year.
• Stop pouring. A half-finished batch at midnight is work in process: countable, but annoying. Most makers finish or don't start.
• Log deliveries before counting. A box of wicks that arrived on the 29th but is still sealed by the door is inventory. Record it as a purchase before you count it, or you'll count it and never have paid for it.
• Pull out anything headed home. The candles you're giving your family aren't business stock. Set them aside and note their cost; that number matters in January.

Publication 538 adds one more rule for custom work: "goods under contract for sale that you have not yet segregated and applied to the contract" stay in inventory (Publication 538 (opens in new tab)). A special order you haven't set aside for the buyer yet is still yours to count.

December 31: count day

Count quantities, not dollars. Dollars come next week, when you aren't shivering.

The mechanics of a clean count, including zones, counting pairs, weighing bulk wax instead of guessing, and tagging each shelf when it's done, are covered in the step-by-step stocktake guide. This post won't repeat them. The year-end count adds just two habits:

1. Put damaged goods in their own pile. A cracked jar, a candle with a sunken top, and last year's discontinued scent don't get the same value as good stock. Count them separately so you can price them differently.
2. Write the date and "as of end of day" on every sheet. In three years, when someone asks where line 41 came from, those sheets are the answer.

Marisol counts from 10 a.m. to 2 p.m. with the garage heater running and a thermos she forgets to open. Her tally: 412 finished candles, 38 pounds of wax, 9 bottles of fragrance oil, 640 jars, 22 candles at the two shops, 30 candles in the hatchback, and a sad little pile of 14 cracked jars and a leaked fragrance bottle.

If you'd rather work from paper, the free Year-End Inventory Reset Checklist covers the prep, the count, and the follow-up in the same order as this calendar.

The first week of January: turn quantities into dollars

Schedule C line 33 (opens in new tab) asks which method you used to value closing inventory: cost, lower of cost or market, or other (with an explanation attached). The Schedule C instructions (opens in new tab) say inventories "can be valued at cost, the lower of cost or market, or any other method approved by the IRS."

Three rules from the IRS publications keep this step honest:

• Stick with your method. Publication 334 says the method you use "must clearly reflect income" and that "your inventory practices must be consistent from year to year."
• Value damaged goods separately. Goods you can't sell at normal prices because of "damage, imperfections, shop wear, changes of style, odd or broken lots" are valued at "their bona fide selling price minus direct cost of disposition," whatever method you use for everything else (Publication 538 (opens in new tab)). That's the pile you made on the 31st.
• Use what you paid, not what it sells for. On the cost method, a finished candle is worth what it cost you to make, not its $28 price tag.

This step tends to be the hardest, because "what it cost to make" means knowing the cost of the wax, the wick, the fragrance, and the jar in this candle. If your purchase records are a shoebox, early January is a hard week.

Mid-January: make the books agree with the count

Now you have two numbers: what your records say you should have, and what you actually counted. Publication 538 (opens in new tab) says the book amount "must be adjusted to agree with the actual inventory." The count wins.

Marisol's books said her ending inventory should be worth $3,050. Her counted and valued total came to $2,610, a $440 gap. When she walked the difference, it split into two very different things:

• $310 of real business loss: 14 cracked jars and a leaked bottle of fragrance oil.
• $130 of candles she took home as holiday gifts.

The second item isn't a business cost at all. Schedule C line 36 (opens in new tab) reads "Purchases less cost of items withdrawn for personal use," so the gifts come out of purchases instead of hiding inside a lower inventory.

The table below runs the same year three ways: on the books alone with no count, counted but with the gifts still inside the numbers, and counted with the gifts removed from purchases.

Lines 37 and 38 are zero here: Marisol pays no one but herself, which line 37 excludes, and she records wax and wicks as purchases.

Read the table from left to right:

• Skipping the count understates cost of goods sold by $310. That's $310 of real breakage she'd pay income and self-employment tax on as if it were profit.
• Counting but leaving the gifts in overstates cost of goods sold by $130, turning personal gifts into a deduction.
• The right column is the one that goes on the return.

The error also doesn't stay in one year. Line 41 becomes next year's line 35, and the form's line 35 asks you to attach an explanation if the two don't match. An overstated ending inventory makes this year's profit too high and next year's cost of goods sold too high. The count fixes both years at once.

This reconciliation is where software beats a spreadsheet. In Ardent Seller, the Guided Stocktake workflow shows each item's system quantity next to the count you enter, flags every variance for review, and posts the adjustments that bring the books in line. The IRS Schedule C report then reads the corrected stock into ending inventory, valued at weighted average purchase cost.

Two details matter at year-end:

• The workflow dates the stocktake the day you run it. Run it on December 31. A count entered on January 3 is dated January 3, lands in the new year, and compares against whatever the books show after two days of orders.
• Your preparer should confirm the valuation. Check that weighted average cost matches the method you've reported in past years.

February: hand the numbers to Schedule C

By now Part III is mostly filled in. What's left is getting the answers to the preparer in a form they can use:

• Line 33: your valuation method, the same as last year.
• Line 34: the form asks, "Was there any change in determining quantities, costs, or valuations between opening and closing inventory?" A yes needs an explanation attached. Moving from "I estimated" to "I counted" is exactly the kind of change to mention to your preparer.
• Line 35: last year's line 41, unchanged.
• Line 36: purchases, minus anything you took for personal use.
• Line 41: the counted, valued, reconciled total.
• The paper trail: the dated count sheets, the consignment counts from each shop, and a one-line note for each variance you investigated.

That's it: one afternoon of counting, spread across a month of small decisions. Marisol spent more time finding her thermos than filling in line 41, and her cost of goods sold is right for the first time in three years.

If your records are what makes January hard, that's the part to fix before December comes around again. Start free with Ardent Seller, run your year-end count as a guided stocktake on December 31, and let the Schedule C report carry the counted total into Part III.

Related reading

• COGS Explained for Makers — What cost of goods sold is and what belongs in each bucket. This post assumes that ground and shows where the year-end count plugs into it.
• How to Do a Physical Inventory Count — The counting technique itself: zones, bulk weighing, and the cycle-count habit that keeps the December variance small.
• Hobby vs. Business Taxes — If you're not yet sure Schedule C is your form at all, start here.
• Shelf Life, Spoilage, and Shrinkage — Where the "real business loss" half of a year-end variance usually comes from, and how to track it before December.

Free resources

Free downloads that line up with the December calendar above:

• Year-End Inventory Reset Checklist — The same freeze-date prep, consignment count, and line 35 to line 42 arithmetic on two printable pages, with a write-off page for the damaged pile.
• Monthly Inventory Count Sheet — Expected, actual, and variance columns for count day, so the mid-January reconciliation starts from a sheet instead of memory.

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This article is provided for educational purposes only and does not constitute legal, tax, or accounting advice. Inventory accounting methods, small business taxpayer thresholds, and Schedule C reporting requirements vary with your circumstances and change over time. Consult a qualified CPA, tax preparer, or attorney before making decisions that affect your business.