Private Label on Shopify? Nail Inventory Management!

Introduction

Private label sellers on Shopify face unique challenges: managing branded inventory, optimizing storage costs, and staying IRS-compliant. In 2025, mastering your inventory flow is the secret sauce to higher margins and worry-free tax filings. Let’s dive into the proven strategies that keep your private label business humming.

Tax Code References

• Inventory Valuation (IRC §§ 471 & 263A): Must capitalize direct (product cost, freight-in) and allocable indirect costs (storage, prep) into inventory until sold.
• Section 179 Expensing (IRC § 179): Qualifying warehouse equipment and software can be expensed immediately.
• Ordinary & Necessary Expenses (IRC § 162): Software subscriptions, packaging, and shipping supplies are deductible when not capitalized.
• Qualified Business Income (IRC § 199A): Pass-through entities may deduct up to 20% of net income after inventory and operating costs.
• Self-Employment Tax (IRC § 1401): Net earnings from your private label venture are subject to Social Security and Medicare taxes.

Relevant Forms

• Form 1040, Schedule C: Report gross receipts, COGS, and deductible expenses.
• Form 4562: Claim Section 179 expensing and depreciation on equipment/software.
• Schedule SE (Form 1040): Calculate self-employment tax.
• Form 1040-ES: Pay quarterly estimated taxes.
• Form 8995/8995-A: Compute your 20% QBI deduction.
• Form 1099-K: Reconcile Shopify Payments receipts.
• State Sales Tax Returns: File in nexus states for product shipments.

Detailed Example

Scenario: PrimePours private-labels insulated drinkware in 2025:

• Inventory Purchases: 2,000 units @ $6 each = $12,000
• Freight-In & Prep: $2,000
• Software Subscription: $500 (inventory management)
• Warehouse Shelving: $3,000 (Section 179 eligible)
• Units Sold: 1,500 @ $20 = $30,000 gross sales

Tax Impact:

1. COGS (IRC § 471): $6×1,500 = $9,000 deducted on Schedule C.
2. Ending Inventory: (2,000−1,500)×$6 = $3,000 capitalized.
3. Section 179 (IRC § 179): Immediate $3,000 deduction on Form 4562.
4. Operating Expense (IRC § 162): $500 software fee.
5. Net Income Before QBI: $30,000 − ($9,000 + $500 + $3,000) = $17,500
6. QBI Deduction (IRC § 199A): 20%×$17,500 = $3,500 potential deduction.

Step-by-Step Guide

1. Set Up Inventory Valuation
   • Choose FIFO or weighted-average costing in Shopify per IRC §§ 471/263A.
2. Record All Costs
   • Log product cost, freight-in, prep, storage, and custom duties.
3. Allocate & Count Inventory
   • Conduct a monthly physical count; reconcile with system records.
4. Capture Equipment Deductions
   • Elect Section 179 or MACRS depreciation on shelving, scanners, and software.
5. Deduct Ordinary Expenses
   • Expense packaging, labels, and subscription fees on Schedule C.
6. Track Sales Tax Nexus
   • Register and collect sales tax in states where you exceed thresholds.
7. File Quarterly Estimates
   • Use Form 1040-ES to cover income and self-employment taxes.
8. Maintain Records
   • Keep invoices, count sheets, depreciation schedules, and state filings.

Conclusion

Nailing inventory management under IRC §§ 471 and 263A empowers private label Shopify sellers to maximize deductions, maintain accurate records, and breeze through tax time. Implement these steps in 2025 and watch your margins grow.

Ready to Perfect Your Inventory & Taxes?

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7. Disclaimer

Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the U.S. and an Enrolled Agent authorized before the IRS. He represents clients in e-commerce tax planning and cross-border compliance. This blog is informational and not a substitute for professional advice.

About Our CPA

With over a decade of U.S. and international tax expertise, Anshul Goyal helps private label entrepreneurs streamline inventory accounting, maximize deductions, and focus on scaling their brands.

Frequently Asked Questions

1. How often should I do a physical count?
At least monthly, or more frequently if fluctuations are high.

2. What costs must I capitalize?
Direct costs (product, freight-in) and allocable indirect costs (storage, prep) under IRC § 263A.

3. Can I expense my inventory software?
Yes – deduct subscription fees on Schedule C as ordinary expenses.

4. When must I elect Section 179?
Assets must be placed in service by December 31, 2025.

5. How long do I keep my inventory records?
The IRS recommends at least four years after filing your return.