How Does Inventory Affect Taxes?

Employees moving inventory inside a warehouse
Employees moving inventory inside a warehouse (Image: Jupiterimages/Stockbyte/Getty Images)

Spending money to turn raw materials into semi-finished or finished goods that are ready to sell does not impact a corporation's profits. The inventory will be carried in the balance sheet at a cost that equals the sum of all expenditures that have gone into its production, with zero impact on financial gain or loss. Since taxes are assessed based on profits, keeping goods in inventory versus selling them immediately does not affect taxes. However, keeping inventory could impact taxes if the goods appreciate or depreciate while sitting in the warehouse or keeping goods in inventory is costly.

Inventory Costs

If the goods to be kept in inventory require no special handling and will be kept in a facility belonging to the producer, there will be no inventory carrying cost. If, however, a warehouse must be rented or goods kept under special conditions, such as a refrigerated depot, holding inventory will cost money. This will reduce profits and therefore taxes. Furthermore, some companies, such as a gold miner or real estate developer, make products that might appreciate in value while in inventory. If goods are sold for higher prices as a result of sitting in inventory, that will boost profits and taxes.

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