Schedule C Lines 33 & 34: Inventory Valuation Methods Explained for Freelancers (2026)

Published: June 27, 2026 · Reading time: 7 min

TL;DR: Schedule C Part III ends with two easy-to-miss questions. Line 33 asks how you value closing inventory — almost every small seller checks (a) Cost. Line 34 asks whether your inventory method changed this year — almost everyone checks No. The numbers that matter are above them: beginning inventory + purchases − closing inventory = Cost of Goods Sold. Bigger closing inventory means smaller COGS and larger taxable profit, because you only deduct goods in the year you sell them. Many freelancers qualify to skip formal inventory accounting entirely and treat goods as supplies. Switching methods later means Form 3115 — which is why Line 34 exists.

If you sell physical products — handmade goods, flipped finds, wholesale resale — Schedule C Part III is where the IRS reconciles what you bought against what you still hold. Most of Part III is arithmetic. The two lines that confuse people are the last two: Line 33 (valuation method) and Line 34 (change in method). Here's exactly what they ask, what to check, and why the answer is usually the boring one.

Where Lines 33 and 34 Sit on the Form

Part III (Cost of Goods Sold) runs Lines 33–42, but the calculation lives on Lines 35–42:

Line	What it captures
33	Method used to value closing inventory (Cost / Lower of cost or market / Other)
34	Was there any change in determining quantities, costs, or valuations?
35	Inventory at beginning of year
36	Purchases (less items withdrawn for personal use)
37	Cost of labor
38	Materials and supplies
39	Other costs
40	Sum of Lines 35–39
41	Inventory at end of year (closing inventory)
42	COGS = Line 40 − Line 41, carried to Line 4

Lines 33 and 34 are policy questions — they tell the IRS the rules you used to produce the closing-inventory figure on Line 41. They don't change the math; they explain it.

Line 33: The Three Valuation Methods

You check exactly one box.

(a) Cost. You value unsold goods at what you actually paid — purchase price plus freight-in and direct costs to acquire them. This is the default for nearly every freelancer, reseller, and maker. Simple, defensible, and what your purchase records already support.
(b) Lower of cost or market (LCM). You may write inventory down to current market value when it has fallen below cost. This helps businesses holding goods that lose value — fashion that goes out of season, perishables, electronics that get superseded. You can't write goods up; LCM only ever reduces.
(c) Other. Any method that isn't the two above (for example, certain retail or rolling-average methods). Choosing this requires attaching an explanation to your return. Freelancers almost never need it.

The practical answer: if you're a sole proprietor selling products and you don't have a specific reason to mark inventory down, check (a) Cost. It matches your receipts, it's the easiest to substantiate in an audit, and it's what the overwhelming majority of small sellers use.

Line 34: "Was There Any Change?" (Almost Always No)

Line 34 asks whether there was any change — in determining quantities, costs, or valuations — between your opening and closing inventory. In plain English: did you change how you do inventory accounting since last year?

No is the answer for nearly everyone. You counted and valued inventory the same way you always have.
Yes is rare and consequential. You'd check it if you switched valuation methods (cost → LCM), changed your costing approach, or otherwise altered how inventory is measured.

Checking Yes generally signals a change in accounting method, which usually requires IRS consent via Form 3115 and an attached explanation. You can't revalue inventory year to year to smooth your profit — Line 34 is the tripwire that surfaces it. If nothing changed, check No and move on.

Do You Even Need Inventory Accounting?

Here's the part that saves most freelancers a headache: you may not have to track inventory at all.

Since the Tax Cuts and Jobs Act, a business that meets the gross-receipts test — average annual gross receipts of $30 million or less for 2026 (inflation-indexed) — can use the cash method and treat inventory as non-incidental materials and supplies. That means you deduct the cost of an item in the year you sell or use it, instead of maintaining formal accrual inventory accounting.

Practically:

A pure service freelancer (designer, consultant, writer) with no goods skips Part III entirely.
A small product seller (Etsy shop, reseller, maker) almost always qualifies for the small-business exception and uses the cash method — but if you carry unsold stock at year-end, you still report beginning and ending inventory on Part III, and the cost of unsold goods stays nondeductible until sold.

Either way, the principle is identical: you can't deduct what you haven't sold yet. Unsold inventory is an asset on Line 41, waiting to become a deduction.

Why Closing Inventory Decides Your Profit

The COGS formula makes the stakes obvious:

Beginning inventory + Purchases + Labor + Materials + Other − Closing inventory = COGS

Closing inventory is subtracted, so:

Higher closing inventory → lower COGS → higher taxable profit.
Lower closing inventory → higher COGS → lower taxable profit.

A worked example: you start the year with $2,000 of inventory, buy $8,000 more, and finish with $3,000 unsold.

COGS = $2,000 + $8,000 − $3,000 = $7,000.
That $7,000 is your deduction; the remaining $3,000 sits on Line 41 and isn't deductible until you sell it next year.

Get the closing count wrong and you misstate Line 4 gross profit, Line 7 gross income, and ultimately your self-employment tax. That's why a clean year-end count — and consistent valuation — matters more than which box you check.

The Records That Make Part III Hold Up

Inventory is one of the most audit-sensitive areas for product sellers because it's easy to fudge. Keep:

Purchase invoices for every lot of goods, showing cost and freight-in.
A year-end inventory count — a dated list of unsold items and their cost (a photo of the shelf plus a spreadsheet is fine).
Consistent valuation — value this year the way you valued last year, so Line 34 stays "No."
A clear split between goods bought for resale (COGS) and operating supplies you consume.

If you scan each supplier receipt the day it arrives and tag it as inventory, your beginning balance, purchases, and ending count practically build themselves at tax time.

Frequently Asked Questions

What does Schedule C Line 33 ask, and which box should a freelancer check?

Line 33 asks which method you use to value your closing inventory: (a) Cost, (b) Lower of cost or market, or (c) Other. Most small sellers — Etsy shops, resellers, makers — check box (a) Cost, meaning you value unsold goods at what you paid for them. "Lower of cost or market" lets you write inventory down when its market value drops below cost, which mainly helps businesses holding goods that lose value (perishables, fashion, obsolete stock). "Other" requires attaching an explanation and is rare for freelancers. If you're a simple cash-basis seller treating inventory as non-incidental materials and supplies, you still typically check Cost.

What does Line 34 mean by a "change in determining quantities, costs, or valuations"?

Line 34 asks whether there was any change between the opening and closing inventory — in how you count quantities, assign costs, or value the goods. For almost every freelancer the answer is No. You'd check Yes only if you switched valuation methods (say, from cost to lower of cost or market), changed your costing method, or otherwise altered how inventory is measured from last year. Checking Yes generally signals a change in accounting method, which usually requires IRS consent on Form 3115 and an explanation attached to the return. If nothing about your inventory accounting changed, check No.

Do freelancers and small sellers even need to track inventory?

Often, no. Since the Tax Cuts and Jobs Act, a small business that meets the gross-receipts test (average annual gross receipts of $30 million or less for 2026, indexed) can use the cash method and treat inventory as "non-incidental materials and supplies" — deducting the cost when the item is sold or used rather than maintaining formal inventory accounting. Most freelancers and side-hustle sellers qualify easily. You still record beginning and ending inventory on Part III if you carry goods, but you're not forced into full accrual inventory accounting. A pure service freelancer with no goods skips Part III entirely.

How does closing inventory affect my Cost of Goods Sold and taxable profit?

Cost of Goods Sold (COGS) on Schedule C Part III is calculated as: beginning inventory + purchases + labor + materials + other costs − ending (closing) inventory. The bigger your closing inventory, the smaller your COGS — and the larger your taxable profit. That's why valuation matters: unsold goods are an asset, not yet a deduction. You only deduct the cost of inventory in the year you actually sell it. So padding or undercounting closing inventory directly misstates your profit on Line 4, then Line 7, and ultimately your self-employment tax.

Can I switch inventory valuation methods from one year to the next?

Not freely. Once you adopt a valuation method, the IRS expects you to use it consistently. Switching — for example, from cost to lower of cost or market — is treated as a change in accounting method that generally requires filing Form 3115 (Application for Change in Accounting Method) and, in most cases, IRS consent. That's exactly what Line 34 flags. You can't quietly revalue inventory to manage profit year to year. If you have a genuine business reason to change, talk to a CPA before you file, because the change has to be requested and documented properly.

Authoritative References

Let Your Receipts Build Your Inventory Math

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This guide is general education for U.S. freelancers and Schedule C filers in 2026. It is not personalized tax advice — inventory and accounting-method rules depend on your facts. See IRS Publication 334 and consult a CPA or EA for your situation.

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