Opportunity to Expense Select Inventory Items

Under the Tax Cuts and Jobs Act, a retail owner can write off inventory in the year it is purchased, as long as the item is under $2,500 and their average annual gross receipts for the past three years are under $25 million. This component of the Act allows qualifying businesses to treat inventory as “non-incidental materials and supplies,’ the cost of which can be deducted when paid.  Qualifying businesses would be able to use the cash method of accounting, and in addition to the above way of handling inventory, they would not be required  to pick up accounts receivables and accounts payables as part of income and expense

Prior to the Act ending inventory was indirectly included in net income since it was shown as an asset on the balance sheet and as a negative cost of goods sold item on the profit and loss statement.    And was not deductible until sold in the subsequent year.  Under the new law, you can deduct inventory when you buy it, subject to the above limitations which includes the $2,500 limitation, instead of waiting until you sell it.

Taxpayers that prepare GAAP based accrual basis financial statements will continue to reflect inventory on thei balance sheets of their financial statements.