Lands on Schedule C, Part III — Cost of goods sold — or not, if you take the exception

If you only sell labour and the customer brings the parts, this article is not for you — with nothing bought for resale there is no cost of goods sold and no Part III to fill in. This is for the shop that stocks parts.

Every year a small shop asks the same question: am I small enough to skip inventory accounting? It is a reasonable question with a published answer.

There are four published answers. They do not agree.

The short answer

Source What it prints
Publication 334 (2025) "average annual gross receipts of $10 million or less for the three prior tax years"
Publication 538 (Rev. Jan 2022) "average annual gross receipts of $26 million or less" — "indexed for inflation"
Instructions for Schedule C (2025) No figure. Defers to section 448(c), and says "See Pub. 538"
Rev. Proc. 2025-32, for 2026 $32,000,000

Four IRS sources, three numbers and a redirect. And for a repair shop, not one of them changes the answer.

Which one governs

The chain runs in one direction and it is worth following once.

The form's own instructions are what you file by, and they do not print a number — they defer to section 448(c). Section 448(c) sets a gross receipts test whose amount is adjusted for inflation and published each year in a revenue procedure. For taxable years beginning in 2026 that is Revenue Procedure 2025-32:

"the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $32,000,000"

So $32,000,000 is the 2026 figure, because that is where the instructions point.

Publication 538 is not wrong so much as old: it is the January 2022 revision, it prints $26 million, and it says in the same breath that the amount is indexed for inflation — which is the publication telling you that its own figure will age. It has.

Publication 334's $10 million is the one this site cannot reconcile, and rather than guess at why, the honest position is the one the chain gives: a figure printed without the section 448(c) link behind it is the one to check, not the one to file by. That is not a claim that the publication is in error. It is a claim about which source answers this question.

The general lesson, beyond this numberWhen two IRS pages disagree, follow the form you are actually filing. Its instructions name the authority; the authority names the year's figure. Publications are written to explain, and they are revised on their own schedule — as the January 2022 date on Publication 538 shows plainly.

Why none of it matters to you

Here is the part worth the afternoon it saves.

Auto repair and maintenance: 465,852 sole proprietorship returns, averaging $88,612 of business receipts each.

The threshold you were worried about Your receipts Margin
$10,000,000 ~$88,612 112×
$26,000,000 ~$88,612 293×
$32,000,000 ~$88,612 361×

You qualify under the strictest reading anyone could take. The question that felt like it needed resolving does not need resolving — and that is worth knowing before spending a Saturday on it.

The decision that is actually yours

Qualifying is not the end of it. It opens a choice, and Publication 538 states both options:

"a small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement"

Two permitted methods. They are not the same, and the difference is when the cost of a part reaches your return — which for a shop holding thousands of dollars of stock at year end is the whole question.

This site is not going to tell you which to pick. The detail that decides it lives in the regulations rather than in the plain-language publications, and that gap is itself part of why small shops get this wrong — the accessible sources explain the exception and stop short of the mechanics. It is one conversation with a qualified tax professional, and then the same treatment every year afterwards. Changing methods is not a free decision either.

What this page can do is stop you answering the wrong question first.

For the shop that does keep inventory

If you use the ordinary method, Part III of Schedule C is the arithmetic: beginning inventory plus purchases, labour, materials and other costs, less ending inventory, carried to the front of the form.

And the trap there is a different one — it catches shops that load up on parts in December expecting a deduction. Stock bought is not stock deducted; the timing is not what the cheque date suggests.

Two things that are not this rule

Tools and equipment. A lift, a scanner, a press — these are not inventory at all. They have their own routes: the de minimis election under $2,500 or section 179 with its income limit.

Sublet work. Sending a job to a machine shop or a transmission specialist is a payment in the course of your trade or business, and it can be reportable. That is the other side of the 1099 question and has nothing to do with inventory.

What this reduces to

  1. You are a small business taxpayer. By a factor of a hundred, under any of the figures.
  2. The 2026 number, if you ever need it, is $32,000,000 — from the revenue procedure the Schedule C instructions point at.
  3. Choose a method once, with advice, and keep it.
  4. Do not spend another year on step one.

Common questions

Do I have to keep inventory records for the parts I stock?
Not if you are a small business taxpayer, and on these figures you are. The exception lets you account for inventory without the full capitalisation rules — the Schedule C instructions put it as "a small business taxpayer is not required to capitalize certain expenses to inventory or other property."
What is the gross receipts limit?
That depends which IRS page you read, which is the problem this article exists for. Publication 334 (2025) prints "$10 million or less for the three prior tax years". Publication 538, revised January 2022, prints "$26 million or less" and notes it is indexed for inflation. The Schedule C instructions give no figure and point to section 448(c).
So which figure actually applies for 2026?
$32,000,000. The Schedule C instructions defer to section 448(c), and the section 448(c) amount is set each year by revenue procedure. Revenue Procedure 2025-32 gives it for taxable years beginning in 2026 as average annual gross receipts for the three prior taxable years that do not exceed $32,000,000.
Is Publication 334 wrong then?
It is not the figure to file by, and this article does not claim more than that. The chain of authority runs from the form's instructions to section 448(c) to the revenue procedure that sets it annually. A number printed in a publication without that chain behind it is the one to check, not the one to use.
Does any of this change what I do?
Almost certainly not. Auto repair and maintenance averaged $88,612 of business receipts per return across 465,852 sole proprietorship returns. That is under every one of the four possible answers by two orders of magnitude.
Then what does qualifying actually let me do?
Publication 538: "a small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement." Two permitted methods, and a real choice between them.
Which of the two should I pick?
That is a genuine accounting decision rather than a formality, and the detail that decides it sits in the regulations rather than in the plain-language publications — which is part of why small shops get it wrong. Take it to a qualified tax professional once, and then keep doing it the same way.
What goes in Part III of Schedule C?
For a business that buys goods for resale, cost of goods sold runs from beginning inventory plus purchases, labour, materials and other costs, less ending inventory. The result carries to the front of Schedule C.
I only charge labour and the customer supplies the parts. Does this apply to me?
No, and it makes your return simpler than most. With no goods bought for resale there is no cost of goods sold and no Part III to complete.
I sublet work to another shop. Is that a 1099 question?
It can be. Paying another business for work in the course of your trade or business is reportable where the thresholds are met and the payee is not a corporation — a different rule from anything on this page.

This article is for educational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional about your situation.

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