In accounting, there are different methods to value inventory. When it comes to income tax, there are specific rules your have to follow to value your inventory since the value you place on the items in your-year-end inventory is important in determining your income, and thus income tax.
For income tax purpose, the two acceptable methods of valuing your inventory are by determining:
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- The fair market value of your entire inventory (use either the price you would pay to replace an item, or the amount you would get if you sold an item); or
- The value of individual items (or classes of items, if specific items are not readily distinguishable) in the inventory, at either their cost or their fair market value, whichever is lower.
Once you choose a method of inventory valuation, you must continue to use this method in subsequent years.