Valuation of inventory

Two methods can generally be used to establish the value of business inventory for tax purposes. All items may be valued at fair market value (FMV—as at the end of the particular year), or each item may be valued at whichever is lower—its cost or its fair market value.

There are special rules for property that is held as an “adventure or concern in the nature of trade.” Such property must be valued at the cost at which the taxpayer acquired it, although certain additions to this cost are permitted. This means that a loss on such a property cannot be recognized until the property is disposed of. A common example of this type of a situation is where land is held on the speculation that it can be sold at a profit without further development.

Farmers are subject to special rules regarding the valuation of inventory (see topic 41).