What this line means
The value of your inventory on January 1 of the tax year. This number must match the ending inventory (line 41) from your prior-year Schedule C. If this is your first year in business, your beginning inventory is zero unless you converted personal property into business inventory or purchased stock before opening.
Does this apply to you?
- You sell physical products and had unsold inventory at the start of the year
- You are continuing a business that reported ending inventory last year
- You converted personal assets into business inventory at the start of the year
- You manufacture goods and had raw materials or work-in-progress on hand January 1
Easy to overlook
Beginning inventory must match last year’s ending inventory This number should be exactly what you reported on line 41 of last year’s Schedule C. If the two numbers do not match, the IRS will notice the discrepancy. A mismatch suggests inventory was lost, stolen, or disposed of without being accounted for — or that there is a reporting error. 1 General filing pattern — beginning inventory not matching prior year ending inventory
First-year businesses with converted personal property If you start a business and use personal items as inventory — such as selling your personal book collection through a new bookstore — your beginning inventory is the lower of the item’s fair market value or your adjusted basis (what you originally paid). You cannot claim a higher value than what you paid. 2 IRS Schedule C instructions — Part III, Line 35
Watch out for this
Leaving this line blank when you had ending inventory last year. If you reported ending inventory on last year’s return, that same number must appear here. A blank line with a prior-year ending inventory balance creates an unexplained gap in your inventory accounting.
Footnotes
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IRS Schedule C (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩
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IRS Schedule C (Form 1040) Instructions, Part III, Line 35. https://www.irs.gov/instructions/i1040sc ↩