The federal income tax general rule is that an entity in the business of producing, buying, or selling merchandise must maintain inventories.

Under this general rule, the business must treat the goods it produces or buys for resale as inventory assets on its books and deduct their cost only in the year they are sold.

But in 2018, the Tax Cuts and Jobs Act changed this long-standing rule for small businesses.

Small businesses have three optional alternative ways to treat inventory. They can treat it1

as non-incidental materials and supplies,

the same way it is treated in their applicable financial statements, or

the same way it is treated in their books and records.

Small businesses that elect to use one of the alternative methods are also allowed to use the overall cash method of accounting instead of the more complex accrual method normally required for businesses that maintain inventories.2

Key point. Using the cash method and immediately expensing inventory gives the business great control over its taxes.

What Is a Small Business?

For these purposes, a small business is one whose gross receipts for the previous three tax years do not exceed an inflation-adjusted threshold. For 2026, the threshold is $32 million ($31 million for 2025). Gross receipts include3

total sales after reductions for returns and allowances;

all amounts received for services; and

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