An Amazon seller that qualifies as a small business taxpayer does not have to keep a formal tax inventory under section 471(a). IRS Publication 538 says such a taxpayer “can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income” — either by treating inventory as non-incidental materials and supplies (NIMS) or by following its applicable financial statement or, without one, its books and records. For tax years beginning in 2026, the gross receipts limit is $32,000,000 (Rev. Proc. 2025-32, section 3.30). Switching methods is done on Form 3115, normally as an automatic change. Everything below is quoted from IRS publications, revenue procedures, and the Treasury regulation, checked 2026-10-11. It lays out the rules and the conditions each option depends on, not a recommendation for any one business.
This guide covers the inventory method only. Form 1099-K reporting is in Amazon seller taxes and Form 1099-K, and the monthly bookkeeping mechanics are in Amazon FBA bookkeeping.
The Default Rule and the Small Business Exception
The default is strict. Treasury Regulation 1.471-1(a) says inventories at the beginning and end of each year “are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor.” Selling physical products on Amazon is exactly that case.
Section 471(c) carves out small business taxpayers. IRS Publication 538 (revised January 2022) states the two alternatives:
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 (as defined in section 451(b)(3)). If it does not have an applicable financial statement, it can use the method of accounting used in its books and records prepared according to its accounting procedures.
The same section adds the contrast that matters for cash-basis sellers: “If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.” Pub 538’s hybrid-method section makes the same point from the other side — when an inventory is necessary, “you must use an accrual method for purchases and sales,” with a pointer to the small business exception.
“Skip formal inventory” does not mean “deduct every purchase when you pay for it.” Both 471(c) methods still match product cost to sales in some way. The difference is how much tax-specific inventory machinery sits on top.
Who Qualifies: The 2026 Gross Receipts Test
Pub 538 defines a small business taxpayer as one that has “average annual gross receipts of $26 million or less (indexed for inflation) for the 3 prior tax years” and is “not a tax shelter (as defined in section 448(d)(3)).” Rev. Proc. 2025-23 gives the base as “$25,000,000 or less (adjusted for inflation)”; the amount for each year comes from an annual revenue procedure.
| Tax years beginning in | Inflation-adjusted limit (average of 3 prior years) | IRS source |
|---|---|---|
| 2022 | $27,000,000 | Rev. Proc. 2021-45 |
| 2023 | $29,000,000 | Rev. Proc. 2022-38 |
| 2024 | $30,000,000 | Rev. Proc. 2023-34 |
| 2025 | $31,000,000 | Rev. Proc. 2024-40 |
| 2026 | $32,000,000 | Rev. Proc. 2025-32, section 3.30 |
The 2022-2025 rows are listed in section 22.18(2) of Rev. Proc. 2025-23; the 2026 row is from Rev. Proc. 2025-32 (both read 2026-10-11). The test always looks back: a 2026 tax year is measured by the average of 2023, 2024, and 2025 gross receipts.
Three details from the regulation and Pub 538 change the math for Amazon sellers:
- Sole proprietors and single-member LLCs. Under Treas. Reg. 1.471-1(b)(2)(ii), for a taxpayer that is not a corporation or partnership, the test applies “in the same manner as each trade or business of the taxpayer were a corporation or partnership,” and gross receipts are “the amount derived from all trades or businesses of such taxpayer.” W-2 wages, Social Security benefits, and personal injury awards are excluded. Entity choice is covered in LLC for Amazon FBA.
- Partners and S corporation shareholders include their share of the entity’s gross receipts, per the same paragraph.
- New or short-lived businesses. Pub 538: “If your business has not been in existence for all of the 3 tax-year period used in figuring average gross receipts, base your average on the period it has existed.” Predecessor entities’ receipts are included, and short years are annualized.
Aggregation rules under section 448(c)(2) can combine the receipts of related businesses.
The Section 471(c) Methods Side by Side
The regulation splits the books-based option in two, so there are three named methods in practice. Rev. Proc. 2025-23 section 22.18(1) uses these names.
| NIMS inventory method | AFS section 471(c) method | Non-AFS section 471(c) method | |
|---|---|---|---|
| Regulation | 1.471-1(b)(4) | 1.471-1(b)(5) | 1.471-1(b)(6) |
| Who can use it | Any small business taxpayer | Taxpayers with an applicable financial statement covering the whole tax year | Taxpayers without an AFS for the year |
| When product cost is recovered | Year the item is provided to the customer, or year paid/incurred, whichever is later | As the AFS inventory method does | As the books-and-records inventory method does |
| Cost flow allowed | Specific identification, FIFO, or average cost, used consistently | Follows the AFS | Follows the books |
| Automatic change number (Rev. Proc. 2025-23) | 260 | 261 | 261 |
The AFS definition comes from section 451(b)(3) and Treas. Reg. 1.451-3(a)(5), which ranks the qualifying statements. The regulation adds that “[a] taxpayer has an AFS for the taxable year if all of the taxpayer’s taxable year is covered by an AFS,” and that a taxpayer with an AFS “may not use the non-AFS section 471(c) inventory method.”
How the NIMS Method Works for an Amazon Seller
The NIMS rule is one sentence in Treas. Reg. 1.471-1(b)(4)(i): the costs “are recovered through cost of goods sold only in the taxable year in which the inventory is used or consumed in the taxpayer’s business, or in the taxable year in which the taxpayer pays for or incurs the cost of the inventory, whichever is later.” The next sentence defines the trigger: inventory “is used or consumed in the taxpayer’s business in the taxable year in which the taxpayer provides the inventory to its customer.”
A worked example, using assumed numbers for a calendar-year seller:
| Event | Units | Unit cost | Recovered in 2025 | Recovered in 2026 |
|---|---|---|---|---|
| Paid supplier, November 2025 | 1,000 | $6.00 | — | — |
| Sold and shipped to customers in 2025 | 700 | $6.00 | $4,200 | — |
| Still in an FBA warehouse on Dec 31, 2025 | 300 | $6.00 | — | $1,800 when sold in 2026 |
Under NIMS the 300 unsold units are not deducted in 2025, even though they were paid for in 2025. The timing looks a lot like regular inventory accounting. What NIMS removes is the rest of the section 471(a) apparatus — the regulation lets NIMS users identify costs with specific identification, FIFO, or average cost, and bars them from LIFO and other 471 methods.
Two limits sit in the same paragraph. Costs treated as NIMS “are not eligible for the de minimis safe harbor election under § 1.263(a)-1(f)(2),” and the seller still has to know which units reached customers in which year. That unit count is the same data an inventory tracking system already produces.
The Books-and-Records (Non-AFS) Method
Most small Amazon sellers do not have an applicable financial statement, so the second option usually means the non-AFS method. Treas. Reg. 1.471-1(b)(6)(i) describes it as “the method of accounting used for inventory in the taxpayer’s books and records that properly reflect its business activities for non-tax purposes and are prepared in accordance with the taxpayer’s accounting procedures.”
The practical effect is in (b)(6)(i): “Costs that are generally required to be capitalized to inventory under section 471(a), but that the taxpayer does not capitalize in its books and records are not required to be capitalized to inventory.” In plain terms, the tax inventory follows whatever the seller’s books capitalize. If the books carry only the supplier invoice as inventory and expense inbound freight right away, the tax return can follow that.
The same paragraph sets a floor: an inventory cost “does not include a cost that is neither deductible nor otherwise recoverable” under other Code provisions, naming sections 162(c), (e), (f), (g), and 274. The books also have to be real books. They need consistent rules for what gets capitalized, which is where Amazon accounting software earns its place. Landed-cost choices here change reported margin too; see FBA profit margin.
Changing Your Inventory Method With Form 3115
Pub 538: “If you want to change your method of accounting for inventory, you must file Form 3115.” For a qualifying small business taxpayer, moving to a 471(c) method is an automatic change under section 22.18 of Rev. Proc. 2025-23. Per its effective date section, that procedure applies to a Form 3115 “filed on or after June 9, 2025, for a year of change ending on or after October 31, 2024.”
| Change | Rev. Proc. 2025-23 section | Change number |
|---|---|---|
| To the NIMS inventory method | 22.18(1)(a) | 260 |
| To the AFS or non-AFS section 471(c) method | 22.18(1)(b), (c) | 261 |
| From a 471(c) method back to section 471(a) | 22.20 | 263 |
The Form 3115 instructions (revised 12/2022) still list change number 235 for this exception, but add that it “does not apply to tax years beginning on or after January 5, 2021” and point to 260 or 261 instead.
How the filing works, per section 22.18 and the instructions:
- Reduced filing. Section 22.18(6) requires only the identification section of page 1, the signature section, Part I, Part II except line 16, and Part IV except line 25 (Form 3115, Rev. December 2022).
- Two copies. The original is attached to the timely filed return (including extensions) for the year of change. A signed copy goes to the IRS National Office “no earlier than the first day of the year of change and no later than the date the original is filed.” The instructions add that “The IRS does not send acknowledgements of receipt for automatic change requests.”
- Concurrent changes. Section 22.18(7) allows one Form 3115 for the inventory change plus the small business UNICAP exception (section 12.16) and/or the cash method change (section 15.17), if each change number is entered.
- Leftover adjustments. If a section 481(a) adjustment remains from an earlier change to section 471(a) inventory accounting, section 22.18(4) says the seller “must take the remaining portion” into account in the year of change.
When a Seller Outgrows the Exception
Growth ends eligibility. Once the three-year average exceeds the limit for the year, the seller goes back to section 471(a) inventories through change number 263. Section 22.20(3) waives the usual five-year eligibility bar when the change is made “in the first taxable year that the taxpayer does not qualify as a small business taxpayer.” Section 22.18(5) does the same in the other direction, so a seller who drops back under the limit can return to a 471(c) method. For corporations and partnerships on the cash method, Pub 538 adds that failing the test forces a change to an accrual method “effective for the tax year in which the entity fails to meet this test.”
Common Mistakes With Section 471(c)
- Treating NIMS as “deduct at purchase.” The regulation recovers cost in the year of sale to the customer or the year of payment, whichever is later. Stock sitting in FBA at year-end stays undeducted.
- Using the old $25 or $26 million figure. Pub 538 still prints the 2022 framing. The 2026 figure is $32,000,000.
- Testing the wrong year. The test uses the three prior tax years, not the current year’s sales.
- Filing change number 235. It stopped applying to tax years beginning on or after January 5, 2021.
- Switching on the return without Form 3115. Pub 538 requires the form for any inventory method change.
- Assuming no records are needed. Every 471(c) method still needs unit-level sales timing or consistent book capitalization rules.
Frequently Asked Questions
Do Amazon FBA sellers have to keep inventory for taxes?
Not under section 471(a) if they meet the small business test. Pub 538 says a small business taxpayer “can choose not to keep an inventory” but must still use a method that “clearly reflects income.” The two choices are NIMS treatment or following an applicable financial statement or, without one, the books and records.
What is the gross receipts limit for section 471(c) in 2026?
For tax years beginning in 2026, average annual gross receipts for the three prior tax years must not exceed $32,000,000, per Rev. Proc. 2025-32 section 3.30. The 2025 figure was $31,000,000 (Rev. Proc. 2024-40). The taxpayer also cannot be a tax shelter under section 448(d)(3).
Can I deduct inventory when I buy it under the NIMS method?
No. Treas. Reg. 1.471-1(b)(4)(i) recovers NIMS costs in the year the item is provided to the customer or the year it is paid for or incurred, whichever is later. Units bought in December and sold in January are recovered in the January year.
Which Form 3115 change number applies to a section 471(c) inventory change?
Rev. Proc. 2025-23 assigns 260 for a change to the NIMS method and 261 for the AFS or non-AFS section 471(c) method. Change number 263 covers moving back to section 471(a).
The Bottom Line
Section 471(c) gives Amazon sellers under the gross receipts limit ($32,000,000 for tax years beginning in 2026) a way out of formal tax inventory. NIMS still recovers cost when units reach customers. The non-AFS method lets the tax inventory follow the seller’s books. Either change is an automatic Form 3115 filing under change number 260 or 261. Before choosing, check the three-year average, whether an AFS exists, and whether the books capitalize product costs consistently. Tax identity details that feed the return are covered in Amazon tax information interview.