Schedule C Treating Inventory as NIMS

[Jenna_PCUser]

I have a small business owner (gross receipts well under $25M per year) that sells physical goods. 

Their P&L reports COGS to me and they file taxes on a cash basis. 

I understand there is a way for them to report COGS as non-incidental materials and supplies (NIMS). 

My question is: how should I be entering this into Proconnect? 

Option 1: Enter the COGS as an expense on the supplies line 22 of schedule C

Option 2: Enter the COGS as materials and supplies on line 38 in part III of schedule C

Are there other reporting requirements for this taxpayer that I need to be aware of, such as lines 35 or 41 in part III of schedule C or filing? 

This is the first tax year of them having these expenses. 

Thank you for your help!  

[TaxGuyBill]

Non-Incidental Materials and Supplies are deducted when used, not purchased.  It seems like pretty much the same timing as keeping Inventory, so is there a reason why they are using NIMS as opposed to Inventory?

But there is a third option, *IF* they qualify for it.  The simple version is that if they DON'T keep Inventory for other purposes and their Accounting Procedures deduct it for their 'books', then it can also be a tax deduction.  See Regulation §1.471-1(b)(6).

https://www.irs.gov/publications/p538#en_US_202112_publink1000270704

https://www.law.cornell.edu/cfr/text/26/1.471-1