Inventory Management for Wholesale Sellers on Shopify

Wholesale Sellers on Shopify

Managing inventory for wholesale clients on Shopify involves more than tracking large order volumes – it requires precise costing, compliance with IRS capitalization rules, and strategic tax planning. Get ahead in 2025 by mastering inventory accounting, maximizing deductions, and avoiding costly errors.

Tax Code References

• Inventory Costing (IRC § 471 & § 263A): Must capitalize direct (purchase cost, freight-in) and allocable indirect costs into inventory until sold.
• Ordinary & Necessary Expenses (IRC § 162): Software subscriptions, warehousing fees, and shipping supplies are deductible when not capitalized.
• Section 179 & Depreciation (IRC §§ 179 & 167): Qualifying equipment (e.g., shelving, forklifts) can be expensed immediately or depreciated.
• Qualified Business Income (QBI) Deduction (IRC § 199A): Up to 20% deduction on net income from your pass-through wholesale business.
• Self-Employment Tax (IRC § 1401): Net earnings from your Shopify wholesale operation are subject to Social Security and Medicare taxes.

Relevant Forms

• Form 1040, Schedule C: Report gross receipts, COGS, and deductible expenses.
• Form 4562: Elect Section 179 or claim depreciation on equipment.
• Form 1040-ES: Pay quarterly estimated taxes on net income.
• Schedule SE (Form 1040): Compute self-employment tax.
• Form 8995/8995-A: Calculate QBI deduction.
• Form 1099-K: Reconcile third-party payment processor receipts.
• State Sales Tax Return: Remit tax in nexus states on wholesale shipments.

Detailed Example

Scenario: BoldBrands sources eco-friendly water bottles wholesale and sells through Shopify in 2025:

• Inventory Purchases: 5,000 units @ $8/unit = $40,000
• Units Sold: 4,000 @ $20/unit = $80,000 gross sales
• Tiered Discounts & Returns: $2,000 allowances
• COGS: 4,000 × $8 = $32,000
• Operating Expenses: $3,000 (inventory software, packaging)
• Equipment Purchase: $10,000 warehouse shelving (Section 179 eligible)

Tax Impact:

1. COGS Deduction (IRC § 471): $32,000 on Schedule C.
2. Expense Deductions (IRC § 162): $3,000 ordinary expenses.
3. Section 179 Expensing: $10,000 equipment fully expensed on Form 4562.
4. Inventory Ending Balance: 1,000 units @ $8 = $8,000 capitalized.
5. QBI Deduction (IRC § 199A): 20% of qualified income after above = approx. $5,600.
6. Net Taxable Income: $80,000 − ($32,000 + $3,000 + $10,000) = $35,000 → after QBI ≈ $29,400 subject to income tax.

Step-by-Step Compliance Guide

1. Set Up Inventory Valuation:
   • Configure Shopify to track FIFO or weighted-average costing per IRC § 471/§ 263A.
2. Record All Costs:
   • Enter purchase cost, freight-in, customs duties, and storage fees.
3. Allocate Tiered Discounts & Returns:
   • Net against gross receipts; adjust allowances in your accounting system.
4. Reconcile 1099-K Reports:
   • Match Shopify Payments, Stripe, or PayPal 1099-K amounts to your sales records.
5. Track Equipment Purchases:
   • Record qualifying assets; elect Section 179 or use MACRS on Form 4562.
6. Calculate Ending Inventory:
   • Perform periodic counts; ensure ending inventory agrees with Schedule C entry.
7. File Quarterly Estimates:
   • Use Form 1040-ES deadlines (4/15, 6/15, 9/15, 1/15) to avoid underpayment penalties.
8. Maintain Detailed Records:
   • Keep invoices, count sheets, depreciation schedules, and tax filings for four years.

Conclusion

Effective inventory management under IRC §§ 471 and 263A is critical for wholesale success on Shopify. By capitalizing costs correctly, leveraging Section 179, and maintaining robust reconciliations, you’ll maximize deductions and ensure IRS compliance.

Ready to Streamline Your Wholesale Inventory & Taxes?

Claim your free strategy session with CPA Anshul Goyal today – unlock hidden savings and scale smarter!

Disclaimer

Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and an Enrolled Agent authorized to practice before the IRS. He represents clients in tax litigation and specializes in cross-border and e-commerce tax planning. This blog is for informational purposes and does not constitute formal tax advice. Please consult a qualified professional for your specific situation.

About Our CPA

With over a decade of U.S. and international tax expertise, Anshul Goyal helps wholesale entrepreneurs optimize inventory systems, reduce tax liabilities, and focus on profitable growth.

Frequently Asked Questions

1. How do I account for tiered pricing discounts?
Record allowances against gross receipts and adjust COGS if tied to inventory cost.

2. When must I capitalize indirect inventory costs?
Per IRC § 263A, allocable costs like freight-in and storage must be capitalized.

3. Can I expense my warehouse shelving?
Yes – if qualified, elect Section 179 on Form 4562 or depreciate under MACRS.

4. How often should I reconcile ending inventory?
At least quarterly, or more frequently if margins are tight.

5. What records should I keep for four years?
Invoices, inventory counts, depreciation schedules, 1099-K forms, and tax returns.