How do I determine the value of my inventory at the beginning of the year?

If you own your own business that either buys or makes goods for sale, you will need to record the value of your inventory at the beginning of the year. If you make your own goods for sale, this amount must include raw materials, goods in process, and finished goods. Valuing your inventory is important for the purposes of determining your income. For income tax purposes, there are two accepted methods for valuing your inventory at the beginning of the year:

  • Value your entire inventory at Fair Market Value (FMV). Using this method you can use either the cost you would pay to replace an item or the amount you would receive if you sold the item; or
  • You can value each item individually either at its FMV or their cost, whichever is less. Cost is the price you incurred for an item and can include any expenses you might incur to bring the item to your business’ location. When you cannot tell the difference between one item and the next, you can then value the items as a group.

Note: Once you have chosen your inventory valuation method, you must use that method consistently.


Where can I learn more?