Understanding how inventory is taxed can be confusing, even for experienced business owners. In this article, we’ll cover the basics of inventory taxes, how they are classified, how they impact your business, how to calculate cost of goods sold, and why it’s important to understand the basics of inventory taxes.

How is Inventory Taxed?

Inventory taxes, when applied, are usually included in a state’s Business Tangible Personal Property Tax. They are sometimes defined as “intangible property.” Inventory taxes are classified in the same column as property tax. It is a tax imposed on a company’s unsold stock at the end of the year. When inventory is sold, the business must pay income taxes on the profits from these sales. The cost of goods sold (COGS) is subtracted from the gross income when calculating the taxable profits.

Inventory Taxation and Cost of Goods Sold (COGS)

Inventory is not directly taxable as it is cannot be bought or sold. The carrying cost for inventory entails a few hidden fees, such as storage, depreciation, and insurance costs. While inventory is not directly taxable, it is used to calculate a business’s cost of goods sold, or COGS. COGS is a component in calculating the business’s taxable income, which is the amount of money the business has made after deducting all expenses.

Inventory Tax Deductions

Items that cannot be sold or are “worthless” can be taken out of inventory, and the loss is reflected as a higher cost of goods sold on your tax return. This will reduce the taxable income for the business, resulting in a lower overall tax bill.


Inventory taxes can be complicated, but understanding the basics can help you maximize your tax deductions. Knowing how inventory is taxed and how to calculate cost of goods sold can help your business save money when filing taxes. For more information about selling a business, tax deductions, and business brokers, be sure to visit Atlantabusinesses.com.

What is the procedure for determining inventory for tax purposes?

To calculate year-end inventory, start by counting the number of each item or SKU you have in your inventory. Then, take the count of each item or SKU and multiply it by its value to get an item valuation. Lastly, add up the value of all the items or SKUs to get a total ending inventory value.

What is the impact of inventory on taxes?

Inventory can have an effect on a company’s taxable income by decreasing the amount of money that needs to be taxed. By deducting the cost of goods sold from the overall revenue, businesses can lessen their taxable income and, as a result, their tax obligation.

Do you need to declare inventory on your taxes?

Inventory isn’t subject to taxation, however it is used to work out a company’s cost of goods sold (COGS), which is a factor when determining the business’s taxable income.

Do taxes apply to inventory as a type of asset?

Inventory is not something that can be deducted from your taxes as it is considered to be an asset. Therefore, it is not considered to be an expensable item.