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This is still applicable although the IRS has become stricter on the rules. If a small business qualifies to treat inventories as non-incidental materials and supplies, they can deduct incidental costs in the current tax year. Incidental costs included in ending inventory the prior year gets deducted over the next 4 years. Form 3115 must be completed to change the accounting method with the IRS and the books and records of the taxpayer must reflect the election. If a business keeps up with inventory on their books, they cannot take the election.
Incidental materials and supplies can be deducted the year paid.
Non-Incidental materials and supplies include inventory and can be deducted in the year paid or the year they were provided to the customer, whichever is later.
This is directly from the IRS instructions for schedule C 2019:
"To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.
Example.
You change to the cash method of accounting and choose to account for inventoriable items in the same manner as non-incidental materials and supplies for the 2019 tax year. You accrued sales in 2018 for which you received payment in 2019. You must report those sales in both years as a result of changing your accounting method and must make a section 481(a) adjustment to prevent duplication of income.
A net negative section 481 adjustment is generally taken into account in the year of change. A net positive section 481(a) adjustment is generally taken into account over a period of 4 years. Include any net positive section 481(a) adjustments on line 6. If the net section 481(a) adjustment is negative, report it in Part V."
Stacy Hauser, CPA
