Home Business Deductions: Inventory, Shipping, Supplies

Running a business from home creates a layered set of tax deductions — from the products you stock and ship to the equipment on your desk and the packing tape in your closet. Understanding how the IRS treats inventory costs, shipping expenses, and business supplies can mean the difference between a healthy deduction and a missed opportunity. The rules differ depending on whether an item is part of your Cost of Goods Sold, an operating expense, or a depreciable asset, and getting the classification right matters both for maximizing deductions and for staying audit-proof.

Data Notice: The deduction and credit data in “Home Business Deductions: Inventory, Shipping, Supplies” uses projected 2026 amounts from IRS inflation indexing. Phase-out ranges and qualifying criteria may change with new legislation. Verify with IRS publications and a qualified tax advisor. [home-business-inventory-deductions]

The content in this home business deductions: inventory, shipping, supplies guide is educational and informational. It should not be relied upon as tax, legal, or financial advice. Individual tax situations require personalized analysis by a qualified professional. Consult a CPA or enrolled agent for your specific needs.

Cost of Goods Sold: The Foundation for Product-Based Businesses

If your home business sells physical products — whether handmade crafts, resold items, or manufactured goods — you must calculate Cost of Goods Sold on your tax return. COGS reduces your gross income before other deductions are applied, and it captures the direct costs of producing or acquiring the goods you sold.

What Belongs in COGS

Raw materials: Fabric, wood, beads, metals, ingredients — anything you transform into a finished product
Wholesale inventory: Products purchased for resale at markup
Direct labor: Wages paid to employees or contractors who directly produce goods (not administrative staff)
Inbound freight and shipping: Costs to receive inventory from suppliers
Manufacturing supplies: Items consumed in the production process (dyes, adhesives, finishing materials)
Storage costs directly tied to inventory: Rent for a storage unit used exclusively for business inventory

What Does NOT Belong in COGS

Office supplies (pens, paper, printer ink)
Marketing and advertising costs
Website hosting and platform fees
Administrative salaries
Home office expenses
Outbound shipping to customers (debatable — see below)

The COGS Formula

Beginning Inventory
+ Purchases During the Year
+ Direct Labor and Materials
+ Other COGS Costs
- Ending Inventory
= Cost of Goods Sold

This formula means unsold inventory at year-end is not deducted — only the cost of goods actually sold reduces your income. Accurate inventory counts on January 1 and December 31 are essential.

Inventory Valuation Methods: FIFO, LIFO, and Average Cost

The inventory method you choose determines which units are treated as “sold first” and directly affects your taxable income.

FIFO (First In, First Out)

Assumes the oldest inventory is sold first. In periods of rising costs, FIFO results in lower COGS and higher taxable income because the cheaper, older units are assigned to sales.

Best for: Businesses with perishable goods or items that lose value over time. Also the default IRS-approved method for most small businesses.

LIFO (Last In, First Out)

Assumes the newest inventory is sold first. In inflationary periods, LIFO produces higher COGS and lower taxable income because the more expensive, recently purchased units are assigned to sales.

Important restriction: LIFO requires IRS approval via Form 970 and comes with conformity rules — you must also use LIFO for financial reporting. Most small home businesses avoid LIFO due to its complexity.

Average Cost

Calculates the weighted average cost of all units available for sale and applies that average to each unit sold. This method smooths out price fluctuations and is simpler than FIFO or LIFO.

Best for: Businesses with large quantities of interchangeable items (e.g., bulk craft supplies, identical resale goods).

Choosing and Changing Methods

Once you select an inventory method, you must use it consistently. Switching methods requires filing Form 3115 (Application for Change in Accounting Method) and may trigger adjustments to taxable income. Choose carefully from the start. For tips on managing inventory shipping costs alongside these methods, see this cheapest shipping guide on MailUSA.

Shipping: COGS or Operating Expense?

The classification of shipping costs is one of the most common questions for home-based product sellers. The answer depends on the direction of the shipment and your accounting approach.

Inbound Shipping (Receiving Inventory)

Shipping costs to receive inventory from suppliers are generally included in COGS. This is straightforward — the cost of getting goods to your location is part of your inventory cost.

Outbound Shipping (Sending to Customers)

This is where it gets nuanced. The IRS does not explicitly require outbound shipping to be classified as COGS, and taxpayers have flexibility:

Classification	Effect	When It Makes Sense
COGS	Reduces gross profit directly	When shipping is integral to each sale
Operating expense (Schedule C, Line 27a)	Reduces net profit	When shipping is treated as a separate service

Critical rule: Whichever method you choose, apply it consistently year after year. Do not switch based on which produces a better tax result — the IRS views inconsistency as a red flag.

Free Shipping Offers

If you offer “free shipping” by absorbing the cost, those shipping charges are still deductible — either as COGS or an operating expense. The fact that you did not charge the customer separately does not change your ability to deduct the cost.

Supplies vs. Equipment: The Depreciation Threshold

Not everything you buy for your home business is immediately deductible. The IRS distinguishes between supplies (expensed immediately) and equipment (capitalized and depreciated over time).

Business Supplies (Immediately Deductible)

Items with a useful life of less than one year or costing below the de minimis threshold:

Packing materials (boxes, tape, bubble wrap, labels)
Office supplies (pens, paper, staples, sticky notes)
Printer ink and toner cartridges
Cleaning supplies for your workspace
Small tools under ~$200 (scissors, utility knives, hand tools)

Report on Schedule C, Line 22 (Supplies) or Line 27a (Other expenses).

Equipment (Capitalized and Depreciated)

Items with a useful life exceeding one year and costing above the de minimis threshold:

Computers and laptops (~$800–$2,500+)
Printers and scanners
Label printers and postage meters
Sewing machines, power tools, or production equipment
Furniture (desks, chairs, shelving)
Cameras and photography equipment

The De Minimis Safe Harbor

The de minimis safe harbor election allows businesses to immediately expense items costing up to:

~$2,500 per item (without an applicable financial statement)
~$5,000 per item (with an applicable financial statement — typically audited or reviewed financials)

This means a ~$1,200 laptop or a ~$2,000 label printer can be fully deducted in the year of purchase rather than depreciated. To use this election, include a statement with your tax return and expense the item on your books.

Section 179 Expensing

For items above the de minimis threshold, Section 179 allows immediate expensing of qualifying business equipment up to ~$1,250,000 for 2026. This is particularly valuable for home businesses investing in production equipment, computer systems, or vehicles used for delivery.

Bonus Depreciation

Bonus depreciation allows businesses to deduct a percentage of qualifying asset costs in the first year. For 2026, the bonus depreciation rate is ~60% (phasing down from 100% in 2022). The remaining cost is depreciated over the asset’s useful life.

For a comprehensive overview of depreciation methods and deduction strategies, see our tax deductions complete list.

Home Office Deduction Interaction

The home office deduction is separate from inventory, shipping, and supply deductions but can be claimed alongside them. Key points:

Inventory storage: If you use a portion of your home exclusively for storing inventory, that square footage can be included in your home office deduction — even if it is a closet, basement, or garage
Supplies used in the home office: Deducted separately as business supplies, not as part of the home office calculation
Equipment in the home office: Depreciated or expensed under Section 179 / de minimis rules, independent of the home office deduction

Simplified Method vs. Actual Expense Method

Method	Calculation	Maximum Deduction
Simplified	$5/sq ft	~$1,500 (300 sq ft max)
Actual expense	% of home used for business × actual costs	No cap

The actual expense method generally yields a larger deduction but requires more record-keeping. Either way, inventory, shipping, and supply deductions are claimed separately on their respective Schedule C lines.

Record-Keeping for Home Business Deductions

Audit-proof records for a home-based product business include:

Inventory Records

Beginning and ending inventory counts (physical count or perpetual system)
Purchase receipts for all inventory and raw materials
Records of inventory method used (FIFO, LIFO, or average cost)
Documentation of damaged, donated, or discarded inventory

Shipping Records

Carrier receipts (USPS, UPS, FedEx) with tracking numbers
Platform shipping reports (Etsy, Amazon, eBay)
Postage meter or Stamps.com transaction histories

Supply and Equipment Records

Receipts for all business supplies
Purchase invoices for equipment with dates, amounts, and descriptions
Depreciation schedules for capitalized assets
De minimis safe harbor election statement (if applicable)

Retain all records for at least three years from the date you file. The tax filing deadlines guide details when returns are due and how extensions affect record retention windows.

Frequently Asked Questions

Can I deduct inventory I did not sell this year?

No. Unsold inventory remains on your balance sheet as an asset. Only the cost of goods actually sold is deductible through COGS. However, if inventory becomes obsolete, damaged, or worthless, you can write it down or off — document the reason and method used.

Should I use FIFO or average cost for my small business?

For most home businesses, FIFO is the simplest and most widely accepted method. Average cost works well if you buy the same items in varying quantities at different prices. Avoid LIFO unless you have a specific tax strategy and professional guidance.

Can I deduct supplies I bought at a personal store?

Yes, as long as the supplies are used for business purposes. A trip to Walmart for packing tape and shipping labels produces a deductible expense. Keep the receipt and note the business purpose.

What if I use my personal vehicle to ship packages?

You can deduct either actual vehicle expenses (gas, maintenance, insurance proportional to business use) or the standard mileage rate (~$0.70/mile for 2026) for trips to the post office, UPS store, or other shipping locations. Maintain a mileage log with dates, destinations, and business purpose.

How do I handle dropshipping for tax purposes?

Dropshippers typically do not hold physical inventory, so COGS may not apply in the traditional sense. Instead, the cost of goods purchased from the supplier (shipped directly to the customer) is deducted as a cost of sale. Consult a tax professional for proper classification based on your specific arrangement.

Key Takeaways

Home business deductions for inventory, shipping, and supplies follow distinct rules that determine when and how costs reduce your taxable income. Inventory flows through COGS based on your chosen valuation method. Shipping can be classified as COGS or an operating expense — but consistency is mandatory. Supplies are expensed immediately, while equipment above the de minimis threshold must be depreciated or expensed under Section 179. Accurate inventory counts, organized receipts, and consistent accounting methods are the foundation of a defensible tax return. See our Schedule C business income guide for step-by-step filing instructions.

This article is for informational purposes only and does not constitute tax advice. Tax laws change frequently. Consult a qualified tax professional before making decisions based on this information.