A year-end inventory count is a full count of everything you own and haven't sold yet, ingredients, packaging and finished goods, taken as close to the last day of your tax year as you can, and valued at what you paid for it. The total is your closing inventory: on a Schedule C it's line 41, it sets this year's cost of goods sold, and it becomes next year's opening inventory. Plan it a week ahead, freeze movement while you count, include stock that isn't in your building, and watch the deliveries that arrive on the last day.
The short version
- Count on December 31 (or your last day) before or after trading, or count close to it and adjust for what moved.
- Count everything you own: ingredients, packaging, finished goods, frozen dough, and stock at a market stall, consignment shop or co-packer.
- Value it at cost, using the same method every year.
- Get the cut-off right: a delivery invoiced in December belongs in December's count, wherever it's sitting.
- The total goes on Schedule C, line 41. Keep the count sheets.
- TaroStack keeps your stock value at cost, month by month, so the count is a check rather than the whole job. More below.
Why the number matters
Cost of goods sold is opening inventory plus purchases minus closing inventory. So closing inventory works in reverse on your profit: every dollar of stock you miss in the count is a dollar of extra cost this year, and a dollar less taxable profit, until next year, when it comes back. Overcount and it's the opposite. Either way it isn't a number to guess. The formula and a month worked through are in how to calculate cost of goods sold for a bakery.
On a Schedule C, Part III, the year-end count is line 41, "Inventory at end of year". Line 35 is the start of the year, which should be last year's line 41, and the form asks you to explain if it isn't (IRS Schedule C, 2025).
What to count, and what to leave out
| Count it | Leave it out |
|---|---|
| Ingredients, in the walk-in, freezer and dry store | Mixers, ovens, pans, racks |
| Packaging that leaves with the product: boxes, bags, labels, jars | Cleaning supplies, gloves, paper towels |
| Finished goods, and frozen dough or fillings, at their cost | Anything already sold and paid for, waiting for pickup |
| Stock at a market stall, a consignment shop or a co-packer, if it's still yours | Stock you hold for someone else |
| Damaged or expired stock, counted separately so it can be written off |
Stock away from your building is the easiest line to forget. If a gift shop holds 40 jars on consignment, they're yours until they sell, and they belong in your count.
Plan it a week ahead
- Pick the time: December 31 after closing, or January 1 before anything moves. Tell everyone.
- Catch up the paperwork first: every delivery received, every batch recorded, every waste line written.
- Print count sheets in shelf order, without expected quantities on them. The inventory count sheet example has a layout that works.
- Pair people up, one counting and one writing, and give each pair one area.
- Write down the number of the last delivery note received and the last order shipped before the count. That's your cut-off.
On the day, count in units you can see (2 cases and 12 cans, a sealed bag plus 41 lb on the scale), and leave the arithmetic for afterwards.
The cut-off: the mistake that moves your tax bill
Some of the costliest year-end errors aren't miscounts. They're things counted in one year and paid for in the other. The rule is consistency: stock and its invoice belong in the same year.
Say two bags of flour arrive at 3 p.m. on December 31, after the count, invoiced December 31 for $50. The invoice is in this year's purchases, so the flour has to be in this year's closing inventory too. Leave it out and cost of goods sold is $50 too high this year and $50 too low next year. The fix is easy if you wrote down the cut-off: add the late delivery to the count, or don't, but match it to where the invoice went.
The same goes the other way for anything shipped on the 31st but not yet invoiced.
If you count on January 2 instead, work back to December 31:
Inventory at Dec 31 = count on Jan 2 + used or sold Jan 1–2 − received Jan 1–2
Value it
Multiply each count by what that item cost you. The Schedule C instructions say inventory can be valued at cost, at the lower of cost or market, or by another method the IRS approves, and line 33 asks which you used (IRS instructions). For a small kitchen the simple, honest version is cost, at the most recent price paid, applied the same way every year. Changing method has its own paperwork, so don't change it on your own.
Damaged and expired stock is worth what you can get for it, often nothing, so count it, write it off, and leave it out of the total.
A year-end count, filled in
Here's a small bakery's count on December 31, priced at cost:
| Where | What | Value |
|---|---|---|
| Dry store and walk-in | Flour, sugar, butter, eggs, chocolate, fruit and the rest | $2,180 |
| Packaging shelf | Boxes, bags, labels, cake boards | $610 |
| Freezer | Cookie dough and par-baked loaves, at what went into them | $340 |
| Gift shop, on consignment | 40 jars of jam and 12 bags of granola, at cost | $190 |
| Closing inventory, Schedule C line 41 | $3,320 |
Without the consignment line, the bakery's closing inventory would be $190 short, and its cost of goods sold $190 too high. The freezer line is the other easy miss: dough is inventory, valued at the cost of what's in it, which is where the steps in recipe costing come in.
The small business exception
For 2025, the instructions say a business with average annual gross receipts of $31 million or less over the previous three years, that isn't a tax shelter, is a small business taxpayer and can choose not to keep an inventory for tax purposes, as long as its method clearly reflects income: treating inventory as materials and supplies, or following how its own books handle it (IRS instructions). Whether that suits you is a question for whoever prepares your return. Counting is still how you find out whether the year made money.
This is general information, not tax advice; your accountant or tax preparer has the last word.
Where this stops working
The year-end count is one long day of counting, and then a longer evening of pricing: finding the last price paid for each of 80 items means going back through invoices, and the consignment shop and the market stall mean phone calls and guesses. Then the count has to be compared with something to know whether it's believable, and if the records were only kept in a spreadsheet, there's nothing reliable to compare it with. A big gap at year end is too late to investigate.
How TaroStack does it
In TaroStack, the number your accountant wants already exists before you count. Every delivery is received at what you paid, with freight spread across it, and every batch and sale takes stock off at those costs, first in, first out. So your stock value is kept at cost, by site and by month, with a history, and December 31's figure is a report. Stock at a market stall, a consignment shop or a co-packer is a site like any other, so it's in the total, not in a phone call.
The count then becomes the check it should be. You count on phones or printed sheets, with no signal needed in the walk-in, and TaroStack shows each difference and what it's worth before it's posted, so a big gap is found on the 31st while someone can still look for it. Counting through the year, the items most worth checking come up first, so December holds fewer surprises. And every list exports to CSV for whoever does your taxes.
Stock value and counting are on every plan, from $49 a month. Start a free 30-day trial in the autumn, import your items and a count from a spreadsheet, and this year's closing number will be waiting for you. If you'd like a hand setting up, ask, and we'll do it with you.