Tax Reduction Podcast

Episode 46. Inventory Tax Strategy

• Boris Musheyev • Episode 46

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If you're an S corporation owner with inventory, you could be missing out on a MASSIVE tax deduction. Most business owners don't know this, but the Tax Cuts and Jobs Act created a loophole that lets you deduct 100% of your inventory - even the stuff you haven't sold yet. Your accountant probably isn't telling you about this.

Here's how the old rules worked: You buy $100,000 in inventory, sell $30,000 worth, and you're stuck with a $70,000 ending inventory you CAN'T deduct. You only got to write off the $30,000 you actually sold. That's the old Section 471 rules that most CPAs are still following.

But here's what changed: If your gross receipts are under $31 million (which makes you a "small business" in the IRS's eyes), you can now elect the non-AFS Section 471(c) method and deduct your ENTIRE inventory purchase immediately. That same $100,000 in inventory? 100% deductible. Even if $70,000 is still sitting in your warehouse.

The secret is Form 3115 - a change in accounting method form. You file it with your tax return, IRS automatically approves it, and boom - you unlock this deduction. No waiting. No back and forth with the IRS.

Want to know exactly how much you're missing? Pull up your last tax return, find Form 1125-A, and look at line 7. That's your ending inventory - money you couldn't deduct before but CAN deduct now using this strategy.

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your attorney, accountant, tax preparer, and/or other advisor regarding your specific situation or your client’s specific situation. The information and all accompanying material are for your use and convenience only.

SPEAKER_00:

If you have a business, especially if you're an S Corporation owner and you report inventory, I'm going to blow your mind. I'm going to show you how you can deduct your inventory a hundred percent. Additionally, I will show you step-by-step instruction that you can do this without involving your accountant. And the best part of this all, you can still do it for previous years taxes if you still haven't filed last year's tax return. Ready? Let's get started.

SPEAKER_01:

Welcome to the Tax Reduction Podcast for Moneymaking Entrepreneurs with Boris Muscheev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies. And this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy-to-understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

SPEAKER_00:

Okay, before we understand the new way, we have to quickly take a look at the old way. Okay, so before the Tax Cuts and Jobs Act was enacted, the way that inventory worked on the Section 471 rules is that when you buy inventory, right, if you only sold$30,000 worth of inventory, then your ending inventory is$70,000, right? So$100 minus 30 of$70,000. But what can you deduct as a cost of goods sold? The answer is that it was$30,000. You cannot deduct inventory if you have not sold it yet. You don't need to do this anymore. So if you're a business owner whose gross receipts are under$31 million, okay, you are considered by the IRS a small business owner. Wow. Okay. So the new way, let's say you buy inventory of$100,000. You were only able to sell$30,000 worth of inventory, but now you have$70,000 worth of inventory left over. What can you write off? Well, the answer is under the new way, you can write off the entire$100,000. I am going to show you how you can take this information, apply it to your situation, and basically go to your account and be like, hey, I know more than you, and this is what we need to do, and I get a write-off. We'll be back right after this break.

SPEAKER_01:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Boris put together a free PDF for you, the business owner. 7 tax write-offs every S Corporation business owner must know. In this PDF, you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

SPEAKER_00:

Alright, welcome back. By the way, if you think another business owner may enjoy this, please share it with them, send them a link, click the share button, subscribe yourself as I have a lot of tax strategies on my channel to help you, the business owner, save money on taxes. Now, let's go back to our inventory. So again, we're assuming you're making less than$31 million, you're considered a small business owner, and you can apply for non-applicable financial statements section 471C. Non-AFS section 471c. What's non-AFS? AFS stands for applicable financial statements. Basically, the non-AFS is broken down into two branches. Okay, branch number one is NIMS. It stands for non-incidental material and supplies, books and records. We're gonna work in books and records because this is a really cool part, but I do want to explain what is non-AMS, okay, in 30 seconds. So non-incidental materials and supplies, IRS says, you know what, if you want to deduct your inventory right away, you have to follow the non-AMS option. And this basically means if you you used or consumed your inventory, what does that mean? Let's take, for example, a bakery, a manufacturing bakery. They produce a lot of bread. So under regular 471 rules, when you buy flour, right, you buy flour to bake that bread, the flour is not tax deductible until the bread is sold. Non-AMS says, you know what, why don't you use it in the bread? You don't have to sell the bread, but as long as you use that flour, you can deduct it. Okay, a little bit better, okay? Now that we understand it, I think it was more than 30 seconds. Let's go with the books and records. This is my favorite one, and this is where I'm gonna show you how you can actually follow through on this, okay? Now, IRS says, look, now that we've got this new uh law, let's follow the books and records method. IRS says, look, you cannot just start deducting inventory. I want to ask you a question, IRS says, right? So do you deduct inventory right away on your books? Now I can tell you that most business owners they don't because when you have a bookkeeper, you always follow what you report on your taxes. You count up your inventory, you have cost of goods sold, you have ending inventory, so on your books, you don't. If the answer is yes, then IRS says, you know what, you don't need to do anything, just start taking a deduction. Now, let's say the answer is no. In most cases, it is no. IRS says, look, if if you're counting ending inventory in your on your books, then we cannot let you take a deduction. You're like, all right, is there a way around it? And absolutely yes. You can file form 3115 with the IRS. You let them know, Mr. IRS, I am changing my method of accounting. I used to report ending inventory and not being able to deduct the inventory at the end of the year. Now I want to be able to deduct it right away and I'm changing my accounting method. Here's another tricky part about this form. You have to wait for the IRS to approve it. But who wants to wait? As a matter of fact, IRS is so great. I think the IRS is amazing. No, I'm kidding. What I think is amazing is our tax code. IRS says, don't you worry about waiting for us to approve it. Just file the form, we automatically approve it, and you can take a deduction. Ladies and gentlemen, just boom. All right. So now in this section right here, we're gonna talk about an example and we're gonna talk about your specific tax situation. Now remember, in order for this to work, for the non-AFS section 471C to work, your gross receipts have to be less than$31 million. That's number one. Number two, I want you to pull up form 1125A. So look at your last year's return. So right now we're in 2025. Assuming you haven't filed 2025 return yet, let's look at uh 2024. So either partnership, uh, S Corporation, C Corporation, whatever you have, right? Pull it up and look at page, I don't know, maybe 1213 of the business tax return. You should find form 1125A. Look on line seven of that form, okay? This is gonna be mind-boggling, ladies and gentlemen. You're gonna find out right now how much money you can save on taxes, okay? So uh pull up line uh seven. That is your ending inventory in 2024. When you filed your 2024 taxes, that ending inventory, you were not able to take that deduction because you were not following the uh non-AFS 471c. Now, look at that number on 2024 return, line 2024 tax return, excuse me, line seven. That ending inventory was not deductible. Now you probably have a new ending inventory for 2025, which you didn't think you would be able to deduct. Well, guess what? Now you can deduct the entire thing in 2025, whatever your ending inventory, whatever is unsold, because you're gonna follow books and records method. Now, determine if you need to file form 3115. We talked about it. If you have been reporting on your bookkeeping, on your internal accounting, whatever that is, inventory as cost of goods sold, and you were not deducting the ending inventory. That's what I mean exactly. You were not deducting the ending inventory, then you need to file form 3115. IRS will automatically approve you, which is pretty cool. You just need to make sure that your tax advisor knows, or if you don't have a tax advisor, get yourself a tax advisor, okay? So make sure your accountant knows how to do this, file 41, uh, file form 3115, and you get a hundred percent write-off on that ending inventory by following this. Ladies and gentlemen, you're welcome. Please go ahead and subscribe to my channel, like it, share it with other business owners that you believe will benefit from this amazing tax strategy. And if you don't have a tax advisor, please get yourself a tax advisor.

SPEAKER_01:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to www.taxplanningcall.com. That's www.taxplanningcall.com. And be sure to subscribe to our podcast to be notified when the next strategy is released.