Amazon FBA Fees and Inventory: COGS, Year-End Counts, Lost Units

Is stock in an Amazon FBA warehouse still my inventory?

Yes, if you still own it. Goods you own stay your inventory wherever they are stored, so units in a fulfillment center at year end belong in your ending inventory, together with units on their way there. Regulation 1.471-1 puts merchandise in inventory when title is yours, even while it is in transit, and includes goods out on consignment. Publication 538 adds goods held for sale in display rooms or booths away from your place of business.

Publication 538 and the regulations cited here do not mention marketplace fulfillment, so the general inventory rules are applied to FBA facts. If a contract with a supplier or a marketplace changes when title passes, the answer follows the title.

In short: purchase price and freight-in are inventory cost. Fulfillment and referral fees are generally selling expenses. Storage, prep and your own shipping to the fulfillment center depend on business size, as set out below.

A case is not simple when:

• FBA stock was never counted at year end, or the count was never tied to purchase invoices.
• Earlier returns show no inventory, or zero ending inventory, while stock existed.
• Reimbursements for lost units are large, or were booked as sales.
• The margins in your books do not match the margins in your platform reports.
• Your average receipts are near or above the small business threshold below, or you own several businesses.

Gather the year-end inventory report, records of shipments to the fulfillment center, purchase invoices with freight bills, and reimbursement reports. The last section lists everything.

Are Amazon FBA fees part of cost of goods sold?

Generally no. Purchase price and freight-in are inventory cost; the fees a marketplace charges to sell and ship an order are selling expenses. Regulation 1.471-3 sets the cost of purchased goods at the invoice price less trade or other discounts, plus transportation and other necessary charges to acquire them. Publication 334 lists freight-in as part of cost of goods sold.

Sort each fee by what it pays for, not by its name on the report. A line that mixes services should be split. Fees pushed into cost of goods sold, or unsold units left out of the count, each distort gross profit.

Are Amazon FBA storage fees part of cost of goods sold?

For a small business taxpayer, no: storage fees are not required to be capitalized and may be deducted. Above the threshold, section 263A requires a reseller to capitalize some storage and handling costs into inventory.

Four details change the storage answer:

• Gross receipts are counted broadly. An individual counts the receipts of all their businesses together, including a share of any partnership's or S corporation's receipts, and related businesses can be combined under section 448(c).
• New businesses. If you have not operated for all three years, the average uses the period you have existed, and a predecessor's receipts count (Publication 538).
• Tax shelters are excluded. A partnership, an LLC taxed as one, or an S corporation is a tax shelter, and loses the exemption, for a year in which more than 35% of its losses go to limited partners or limited entrepreneurs, meaning owners who do not actively take part in management (the spouse, children, grandchildren and parents of an owner who actively manages it throughout the year do not count) (Regulation 1.448-2(b)(2)). It may elect, with a statement on its timely filed return, to test the prior year's allocation instead. An interest offered in a securities offering that had to be registered also makes it one, as does an arrangement with a significant purpose of avoiding federal income tax.
• Marketplace fees are not named. The regulation counts occupancy costs such as rent among the costs of storage and handling, and treats sales to customers who are not physically present, such as mail-order sales, as not on-site. Both point to a warehouse that ships orders as off-site storage. The regulation does not mention marketplace fee bundles, so splitting a fee into storage, handling and pick and pack, and sizing the part tied to unsold units, is a judgment. Section 263A offers a simplified resale method for the allocation.

Above the threshold, capitalizing is required, not a choice. Moving between the small business exemption and capitalizing, in either direction, is a change in accounting method (Regulation 1.263A-1(j)(3)). Revenue Procedure 2025-23 gives automatic consent, when its conditions are met, both to a reseller that must start capitalizing (section 12.01) and to a small business taxpayer that stops (section 12.16). Automatic still means filing Form 3115: the original attached to the timely filed return (extensions included) for the year of change, and a signed copy sent to the IRS no later than the date the return is filed (Instructions for Form 3115). Beginning inventory is revalued, and the difference is a section 481(a) adjustment (Publication 538; see Fixing inventory missing from past returns for how it is spread). At or below the threshold, keep the treatment you chose every year.

Does shipping to Amazon, prep and labeling go into inventory cost?

Freight that brings the goods to you is inventory cost for every seller that keeps an inventory. Freight from your supplier straight to the fulfillment center is generally treated the same way. Your own shipment, prep and labeling depend on size, as with storage.

• Supplier freight: inventory cost under Regulation 1.471-3, which adds transportation and other necessary charges incurred in acquiring possession of the goods.
• Above the small business threshold: Regulation 1.263A-3(c) treats repackaging, assembling, tagging and marking, and moving goods from one of a reseller's storage facilities to another as handling and transportation costs that are generally capitalized. The regulation does not say whether a third-party fulfillment center is the seller's own storage facility, so the shipment from your site to the center is a judgment.
• Small business taxpayer: not required to capitalize these costs. Choose a treatment and keep it.

Duties, packaging and spreading freight across items are in Landed cost in cost of goods sold.

How do I value FBA inventory at year end: what count and what cost?

If you keep an inventory, count every unit you own at year end and value each at cost (or the lower of cost or market, if that is the method you use), not at its selling price. A small business taxpayer that chose not to keep an inventory still tracks unsold units; the next section covers when their cost is deductible.

Count. Start from the year-end quantity report for the fulfillment network. Add units you own elsewhere: on the way to the center, at a prep location, or on their way back to you after a removal. Leave out units sold with title already passed, and stock whose title is not yet yours. Then roll the units forward: units at the start of the year, plus units bought, minus units sold, lost, removed for good or disposed of, equals units at year end. If the roll-forward and the report disagree, find out why before closing the year.

If you keep a perpetual (book) inventory, Publication 538 requires a physical inventory at reasonable intervals, with the book amount adjusted to match. It does not say how to count stock a marketplace holds, so a year-end quantity report reconciled to your own records is a reasonable starting point, and the reconciliation is what you keep. Regulation 1.471-2 lists omitting part of the stock on hand as a method that does not meet the rules.

Cost. Use cost, or the lower of cost or market, whichever you have used consistently. Cost is the invoice price less trade or other discounts plus freight-in, plus any costs section 263A requires. When identical units were bought at different prices and you cannot match each unit to an invoice, Publication 538 lists first-in first-out (FIFO) and last-in first-out (LIFO) for that case, and calls the LIFO rules very complex. LIFO is adopted on Form 970, filed with the timely return for the first year you use it. Any other change in the method or basis used to value inventory needs the IRS's approval through Form 3115.

Cost of goods sold. Opening inventory plus purchases and other costs, minus ending inventory, equals cost of goods sold (Publication 334). A sole proprietor, including a single-member LLC that has not elected corporate treatment, reports it in Part III of Schedule C; a partnership, S corporation or C corporation attaches Form 1125-A. See Schedule C cost of goods sold.

Can I skip inventory accounting if my business is small?

A small business taxpayer may choose not to keep a formal inventory, but it must still use a method that clearly reflects income, and unsold FBA stock still matters. The small business threshold is $32,000,000 of average annual gross receipts for the three prior tax years, and the business must not be a tax shelter (defined above) (Publication 538; Regulation 1.471-1(b)).

Under the non-incidental materials and supplies method, the cost is recovered in the year the unit is provided to the customer, or the year you pay for it if later, so stock sitting in a fulfillment center is not deductible yet. Under the other method the tax treatment follows the method your books or financial statements use, so settle the method before building the books. Changing either needs Form 3115. If you do keep an inventory, you generally use an accrual method for purchases and sales and value the inventory every year.

The two methods are in Inventory or supplies for small sellers; past returns that showed none are in Fixing inventory missing from past returns.

How do I book lost or damaged FBA units?

If you keep an inventory, take them out of the count, at cost. Publication 538 says a casualty or theft loss of inventory is claimed through a higher cost of goods sold by reporting opening and closing inventories correctly. A unit that is simply missing leaves the same way, because cost of goods sold is what remains after ending inventory is subtracted from the goods available for sale (Publication 334).

1. Record each write-off in an inventory adjustment account at the unit cost, with the date and the report that shows the loss, so the unit roll-forward ties.
2. Exclude those units from the year-end count.
3. If a unit you wrote off turns up, put it back at its original cost.

A small business taxpayer on the materials and supplies method has no count to drop the unit from. Under that method cost is recovered when a unit is provided to a customer, and the sources cited here do not say in which year a lost unit's cost is deducted. Settle that with your preparer before booking the write-off.

A damaged unit that can be sold only below normal prices stays in inventory, valued at its bona fide selling price less the direct cost of disposing of it (Regulation 1.471-2).

Am I allowed to deduct lost inventory at the price I paid for it?

The deduction is generally your cost, taken once, through cost of goods sold. It is what you carried the units at in inventory (purchase price plus freight-in, plus any section 263A costs you capitalize), not what you would have sold them for. Inventory is valued at cost, so the loss is the cost that leaves it.

Do not claim the same loss twice. Publication 538 says that once the loss runs through cost of goods sold, you cannot claim it again as a casualty or theft loss. If you instead claim it separately, you must remove the lost items from opening inventory or purchases, and you reduce the loss by the reimbursement you receive or expect to receive. A loss claimed separately cannot include an amount you reasonably expect to recover but have not received by year end. Keep the lost-unit report with the write-off.

How do I book Amazon's reimbursement for a lost or damaged unit?

A reimbursement for a lost or damaged unit is generally taxable. Publication 538 says any insurance or other reimbursement you receive for a casualty or theft loss of inventory is taxable. A marketplace payment for a lost or damaged unit is a payment for the same kind of loss, so the same treatment is the reasonable reading. Post it as a reimbursement for the loss, not as a sale.

The payment can be less or more than the units' cost. The whole amount is taxable either way; if it is more, the sources cited here do not say how to present the excess, so keep the reimbursement report and ask your preparer.

There are two ways to show it:

1. Other income, with the full cost of the lost units in cost of goods sold through the count.
2. A reduction of cost of goods sold.

Publication 538 does not say which one to use. In the same year both give the same taxable profit; they differ in gross profit and in the line the amount lands on. Pick one, use it every year and tell your preparer which.

The year follows your accounting method. The sources do not say how to treat a claim still open at year end when the loss runs through cost of goods sold, so list open claims for your preparer. Post the reimbursement as its own line from the reimbursement report; entries from the settlement report are in Amazon settlement report in your books.

What about removals, disposals and unsellable returns?

Units you own stay inventory until they are sold or gone. How each event hits the books:

Regulation 1.471-2 defines a bona fide selling price as an actual offering of the goods during a period ending no later than 30 days after the inventory date.

What do I give my bookkeeper at year end?

Give your bookkeeper:

• The inventory report as of the last day of the year, saved as downloaded.
• Records of every shipment to the fulfillment center, with dates, units and freight bills.
• Purchase invoices, with discounts, so each batch has a unit cost.
• Last year's closing inventory and the cost method you used.
• The reimbursement reports, and a list of claims still open.
• The fee reports for storage, fulfillment, referral and removal fees.
• A list of lost, damaged, removed and disposed units, with dates and unit costs.
• Your returns for earlier years, if inventory was never reported.

Example

These examples use US dollars and round numbers.

Counting stock and splitting the fees

A seller keeps an inventory, starts the year with no stock and has no other inventory costs. The seller buys 1,000 units at $8 and pays $500 for the supplier's freight to the fulfillment center. Each unit costs $8.50 ($8,500 in all). The seller sells 700 units; 300 remain at year end.

• Cost of goods sold: 700 × $8.50 = $5,950.
• Ending inventory: 300 × $8.50 = $2,550.

Fulfillment and referral fees on the 700 sales are generally selling expenses, not part of the $5,950.

A lost shipment and its reimbursement

Take the same year, but 20 of the 300 unsold units go missing, so the count finds 280. The 20 lost units cost $8.50 each, or $170.

• Ending inventory: 280 × $8.50 = $2,380.
• Cost of goods sold: $8,500 − $2,380 = $6,120, which is the $5,950 for the units sold plus the $170 for the lost units.
• The $120 reimbursement, received that same year, is taxable. Booked as other income, it offsets $120 of the $170, so the lost units cost $50 net. Booked instead as a reduction of cost of goods sold, cost of goods sold is $6,000 and other income is $0; taxable profit is the same.
• Entries: debit inventory adjustment $170 and credit inventory $170; when the $120 arrives, debit bank $120 and credit other income $120.

The seller does not also deduct the $170 as a separate loss.

Storage fees for a small seller

A seller with average receipts of $200,000 for the three prior years pays $1,800 in storage fees. She is a small business taxpayer (not a tax shelter), so she is not required to capitalize them, and her books do not add storage to unit cost. She deducts the $1,800 as an expense and treats storage the same way every year. A seller above the threshold may have to capitalize the part tied to unsold units instead; splitting a bundled fee is a judgment.

Different for you?

• FBA stock was never counted, margins look wrong, reimbursements are large, or past returns show no inventory: the year-end count, the cost, the treatment of reimbursements and the fix for earlier years depend on one another. See Fixing inventory missing from past returns and bookkeeping help.
• Your fee reports bundle storage, handling and pick and pack, or reimbursement claims are open at year end: splitting the fees and choosing how to show reimbursements are judgments that depend on your facts. See bookkeeping help.
• You need the monthly routine or settlement entries: see Amazon seller bookkeeping and Amazon settlement report in your books.
• You pay duties or import goods: see Landed cost in cost of goods sold.
• Stock is unsold or obsolete: see Writing off unsold or obsolete inventory.
• You wonder what an ecommerce bookkeeper handles and costs: see Ecommerce bookkeeper cost and scope.
• Your LLC is foreign-owned: see Marketplace payouts in a foreign-owned LLC.
• You are a Canadian seller with stock in US warehouses: see Canadian sellers with US inventory.
• Your average receipts are near or above the threshold, you own several businesses, or owners who do not manage the business are allocated much of its losses: capitalizing storage and handling may be required. See Schedule C cost of goods sold and bookkeeping help.