This includes any rebates or refunds you received off the purchase price. It also includes any credit you received for returned merchandise. Subtract from your purchases for the year the cost of goods in your product line that you bought for personal use and the cost of goods you withdrew from inventory. Merchandise is considered withdrawn from inventory when it is no longer available for sale to customers. For example, if you sell a particular kind of soap and give some as a gift or use some yourself, you must withdraw the soap from inventory because it is no longer available for sale.
Many direct sellers have little or no inventory.
Others keep a considerable inventory on hand. In either case, if you have income from sales, you need to know how to figure your inventory at the end of each tax year. Your inventory practices must be consistent from year to year. You need to know your inventory at the beginning and end of each tax year to figure your cost of goods sold. Beginning inventory will usually be the same as the prior year's ending inventory.