Chap. 21 – Sch. C: COGS, Vehicle Info, & Other Expenses
In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-
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 2016 on line 36. The amount you can deduct for 2016 is figured on line 42.
Qualifying taxpayer: This is a taxpayer:
To calculate 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.
Qualifying small business taxpayer: This is a taxpayer:
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.
Changing accounting methods: File Form 3115, Application for Change in Accounting Method, if you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-
Additional information: For additional guidance on this method of accounting for inventoriable items, see the following.
NOTE: Certain direct and indirect expenses may have to be capitalized or included in inventory. See Part II, earlier. See Publication 538 for additional information.
Line 33 – Inventory Method: Your inventories can be valued at cost, the lower of cost or market, or any other method approved by the IRS. However, you are required to use cost if you are using the cash method of accounting.
Line 35 – Beginning inventory: If you are changing your method of accounting beginning with 2016, recalculate last year's closing inventory using your new method of accounting and enter the result on line 35. If there is a difference between last year's closing inventory and the recalculated amount, attach an explanation and take it into account when figuring your Section 481(a) adjustment. For details, see the example under Line F, earlier.
Line 41 – Inventory at end of the year: If you account for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 41 the portion of your raw materials and merchandise purchased for resale that is included on line 40 and was not sold during the year.
Fill out this part only if you are claiming car or truck expenses on line 9 and you are not required to file Form 4562, Depreciation and Amortization. See line 13 for whether you have to file Form 4562.
Line 44b -
Line 47 -
Include all ordinary and necessary business expenses not deducted elsewhere on Schedule C. List the type and amount of each expense separately in the space provided and enter the total on lines 48 and 27a. Do not include on this line:
For details on business expenses, see Publication 535, Business Expenses.
Amortization: Include amortization in this part. For amortization that begins in 2016, you must complete and attach Form 4562, Depreciation and Amortization:
You can amortize such costs as:
In most cases, you cannot amortize real property construction period interest and taxes. Special rules apply for allocating interest to real or personal property produced in your trade or business.
For a complete list, see the instructions for Form 4562, Part VI.
Bad debts: Include debts and partial debts from sales or services that were included in income and are definitely known to be worthless. If you later collect a debt that you deducted as a bad debt, include it as income in the year collected. For details, see Chapter 10 of Publication 535.
For details, see chapters 7 and 8 of Publication 535. For amortization that begins in 2016, you must complete and attach Form 4562.
Costs of making commercial buildings energy efficient: You may be able to deduct part or all of the cost of modifying existing commercial buildings to make them energy efficient. For details, see Section 179D, Notice 2006-
Deduction for removing barriers to individuals with disabilities and the elderly: You may be able to deduct up to $15,000 of costs paid or incurred in 2016 to remove architectural or transportation barriers to individuals with disabilities and the elderly. However, you cannot take both a credit (on Form 8826, Disabled Access Credit) and a deduction for the same expenditures.
Excess farm loss deduction: Any loss from this business activity, which includes processing a farm commodity as part of your farming business, that was not allowed last year because of the excess farm loss rules is treated as a deduction allocable to this business activity in 2016.
See the Instructions for Schedule F, Profit or Loss From Farming, for a definition of farming business for this purpose and for more information about excess farm losses.
Film and television production expenses: You can elect to deduct costs of certain qualified film and television productions. You can also elect to deduct costs of certain qualified live theatrical productions that have their first public performance for a paying audience in 2016. For details, see Chapter 7 of Publication 535.
Forestation and reforestation costs: Reforestation costs are generally capital expenditures. However, for each qualified timber property, you can elect to expense up to $10,000 ($5,000 if married filing separately) of qualifying reforestation costs paid or incurred in 2016.
You can elect to amortize the remaining costs over 84 months. For amortization that begins in 2016, you must complete and attach Form 4562.
The amortization election does not apply to trusts, and the expense election does not apply to estates and trusts. For details on reforestation expenses, see Chapters 7 and 8 of Publication 535.
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Individual Income Tax Guide