Ask most resellers what their inventory is worth right now and you'll get a shrug and a number pulled from how full the bins look. Ask them to actually walk the shelves, count every item, and reconcile it against what their own records say should be there, and most have never done it — not this year, not last year. A year-end count is one of the few bookkeeping habits that pays for itself the first time you do it, because it doesn't just produce a tax-form number. It's the one moment a year your records get checked against physical reality instead of trusted on faith.
The one piece the IRS actually asks about
Schedule C's Part III, Cost of Goods Sold, runs on inventory at cost: line 35 is beginning inventory, line 36 is purchases, lines 37 through 39 cover labor, materials, and other costs, line 40 adds them up, line 41 is ending inventory, and line 42 subtracts line 41 from line 40 to get the figure that flows to gross profit on page 1. Line 33 asks how you valued that closing inventory — cost, or lower of cost or market — and the form is explicit that if this year's beginning figure on line 35 doesn't match last year's ending figure on line 41, you attach an explanation. The IRS isn't asking you to guess what your stock would fetch if you listed it today. It's asking what you paid for what's still sitting there, unsold, at your tax year's close.
That's the traditional mechanism, and plenty of resellers' tax software still runs Part III exactly that way by default. It isn't the only mechanism, though. Most individual resellers qualify as a small business taxpayer under the $32 million average-gross-receipts test for 2026 (Rev. Proc. 2025-32) and can instead treat resale stock as non-incidental materials and supplies under Section 471(c) — cost deducted the year an item actually sells, tracked per item, not averaged, which is the approach we've written about before as the simpler and more accurate way to run a reselling business. If that's how your return is filed, there's no line 41 figure forcing a count. But "the IRS doesn't require it" and "you don't need to know it" aren't the same sentence, which is the rest of this post.
Why the count matters even if no form is asking for it
Valued at cost, not at hope. The most common mistake when a reseller does estimate their inventory is pricing it at what they're asking for it, or what they think it'll eventually sell for. That's not your inventory value — it's your hoped-for revenue, and the two numbers can be miles apart on anything that's been sitting a while. Cost is what you actually paid, allocated per item the same way it would be at sale, not the listing price.
Items that sold and never got marked sold. A record that moved at a table sale, a local pickup, a friend-of-a-friend deal — anything sold off the platforms you list on doesn't update your inventory tracker on its own. A physical count is where you notice an item you've been carrying as "active" for three months isn't actually in the bin, because it left in September and nobody updated the record.
Items that are just gone. Damage, a misplaced tote, something that walked off a table — none of that becomes a real deduction by itself. It has to be an actual disposal event you document: discarded, donated, or written off as a loss, with a date and a reason. A count is how you find out something's missing in the first place, instead of carrying its cost on your books indefinitely as phantom inventory that was never going to generate a sale.
Duplicate exposure across platforms. If the same item is live on more than one of eBay, Shopify, or Discogs at once, a count is a natural checkpoint to confirm every "active" item in your own records is pulled everywhere else it's listed — not just marked sold in the one place it actually sold.
A worked example
Say your tracker says you're carrying 340 active items at a combined cost basis of $6,100 going into the count. You physically go through every bin, shelf, and rack and check it against that list.
- 312 items are right where they should be. No issue.
- 9 items sold at a table sale two months ago and were never marked
- sold in your system — combined cost basis $140. They come out of active
- inventory now, and the $140 cost basis attaches to whatever those items
- actually sold for, the same as any other sale, just recorded late.
- 4 items are nowhere to be found — a tote that went missing in a
- move, most likely. Combined cost basis $65. That's a loss you can now
- actually document and write off, dated to when you noticed it, instead
- of quietly carrying $65 of ghost inventory forever.
- 15 items are real and present, but your notes show they're priced
- at what you hope to get ($40 each, $600 total) rather than what you
- paid ($9 each, $135 total). The $600 number was never your inventory
- value — it was wishful thinking wearing a spreadsheet.
End of count: 325 items genuinely on hand, at a corrected cost basis of $5,895, not the $6,100 you started with and nowhere near what a price-tag-based estimate would have shown. None of that changes until someone actually counts.
What to actually do
- Pick a cutoff and count everything against it — midnight on your
- tax year's close, if you're matching your filing, or any date you'll use
- consistently year to year.
- Value at cost, every time. Not retail, not your listing price, not
- what you think it'll go for. What you paid, per item.
- Reconcile against your own records, item by item, not just a total.
- A count that only checks the grand total can have items that sold
- off-platform and items that went missing cancel each other out in the
- math while both problems are still sitting there unresolved.
- Document every discrepancy the day you find it — what's missing,
- what sold somewhere your tracker didn't catch, and the date. That's what
- turns "I think some of this is gone" into an actual, defensible number.
- Do it every year, not just the first time. The value of a count
- compounds: next year's beginning number is only as good as this year's
- ending count.
PalmFlow keeps per-item cost basis and status on everything you've logged, so the "what should be here" side of a count is already sitting in your account instead of a spreadsheet you have to rebuild first — you still have to do the actual walk around your shelves, because no software can see your bins for you. Free plan, 50 items, no card required.
Disclaimer: this is general information, not tax advice. Whether your return runs Schedule C's inventory formula or the Section 471(c) small business method, and how to document a missing or damaged item, depend on your specific situation — confirm with a CPA or tax software before relying on any of the above.