Inventory - Inventory is an asset that represents the primary source of revenue generation for a company that sells products to customers (as opposed to services). Inventory can be classified as raw materials, work in progress, or finished goods. The turnover of inventory assets is generally shorter than that of other business property/capital assets. 

Capital Assets - In contrast, capital assets are resources owned by a company in order to allow for the continued development and sale of its core service or product (inventory). Capital assets can be categorized as financial resources (stocks and investments) or physical resources (buildings, furniture, machinery, and equipment). 

The tax implications of distinguishing between these two types of assets are important as it will determine the calculation of your ultimate tax liability.  When inventory is sold, the cost basis of these items is used to reduce the income captured upon their sale.  Income from sales of inventory is considered ordinary income and the related inventory cost would be factored in as an ordinary deduction. 

The term ordinary is used to signify that this type of income comes about through the daily operations of the company.  When capital assets are sold, the gain on the sale can be taxed as ordinary or capital depending on the use of the business property. Sales of business capital assets used in the ordinary course of business will be taxed at ordinary rates. Whereas sales of non-business use capital assets will be taxed at capital rates. The distinction between business use and non-business use capital assets will impact how you calculate your taxable income and determine your liability for the year.

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