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 to facilitate the ongoing development and sale of its core service or product (inventory). Capital assets can be categorized as financial resources (such as stocks and investments) or physical resources (including buildings, furniture, machinery, and equipment).

Understanding the distinction between inventory and capital assets becomes crucial when considering the tax implications, as it directly affects the calculation of your overall tax liability. When inventory is sold, the cost basis of these items is used to reduce the income captured upon their sale. The income from the sale of inventory is considered ordinary income, and the corresponding inventory cost would be factored in as an ordinary deduction.

The term "ordinary" indicates the type of income that comes from the daily operations of the company. In contrast, when capital assets are sold, the resulting gain can be subject to either ordinary income or capital gains tax, depending on the utilization of the business property. Sales of business capital assets that are 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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