Yes. Shipping charges are included in inventory costs when they are inbound freight, meaning what you paid to get goods from your supplier to your location. That cost sits on the balance sheet as part of the inventory asset and only moves to cost of goods sold when the product is sold. Shipping you pay to send goods out to a customer is different: it’s a selling expense in the period you incur it, and it never touches the inventory account.
Inbound Freight Gets Capitalized, Outbound Freight Gets Expensed
The direction of the shipment decides the treatment. Inbound shipping, called freight-in, is a product cost. It’s added to the value of the inventory it brought in and stays there until the goods are sold. Outbound shipping, called freight-out, is a period cost. It hits your income statement immediately as a selling expense.
A quick example. A distributor pays $100 to receive a pallet of electronics from the manufacturer. That $100 gets added to inventory. Later, the distributor pays $15 to ship one of those units to a customer. That $15 is a selling expense, recorded when incurred.
Misclassifying either side distorts two statements at once. Capitalize outbound freight by mistake and you overstate inventory, understate selling expenses, and inflate reported profit. The rule to hold onto: costs flowing toward your business are product costs; costs flowing toward your customer are period costs.
What Else Belongs in Inventory Alongside Freight
Freight-in is the most visible add-on, but the full “landed cost” of inventory captures everything you spent to get the goods to your location and ready for sale:
- Import duties and tariffs on goods brought in from abroad.
- Non-refundable sales or use taxes on the purchase.
- Transit insurance premiums covering the goods during shipment.
- Wages for receiving, inspection, and handling of incoming stock.
Costs that arise after inventory is ready for sale are period expenses. Ongoing storage of finished goods, general administrative overhead, and losses from abnormal spoilage all hit the income statement immediately.
One subtlety catches people. High freight rates driven by market conditions are still capitalizable. “Abnormal” freight, which does not go into inventory, means costs from duplicative activity outside the normal supply chain, such as paying to reship goods after a routing error.
Shipping Terms Decide When The Freight Is Yours To Capitalize
You can only add freight to inventory you actually own. Your shipping terms fix the moment ownership transfers.
Under FOB shipping point, you own the goods the moment they leave the seller’s dock. Goods on a truck heading to you are already your inventory, and the freight is yours to capitalize. Under FOB destination, the seller keeps ownership until the goods arrive at your location, so you don’t record the inventory or the freight until delivery.1eCFR. 27 CFR 46.205 – Guidelines to Determine Title to Articles in Transit
This matters most at period-end. If you buy FOB shipping point and a shipment is in transit on December 31, those goods belong on your balance sheet even though they haven’t arrived. Miss the entry and you understate both inventory and the payable. Auditors look for this one.
Splitting One Freight Bill Across Multiple Products
When a single freight charge covers a mixed shipment, you need a consistent method for dividing it among the items. Three approaches are common:
- Weight-based allocation, where each item absorbs freight in proportion to its share of shipment weight. Works well when heavier items really do drive the shipping cost.
- Volume-based allocation, based on cubic space occupied. Better for bulky, lightweight goods.
- Value-based allocation, where more expensive items carry a larger share of the freight. Often considered the most precise because cost tracks economic significance.
Pick a method, apply it consistently across periods, and document why it fits your business. Switching methods without justification invites questions.
If your total freight-in is genuinely immaterial, expensing it as incurred is acceptable as a practical shortcut. The bar for “immaterial” is high, though, and businesses subject to UNICAP will have a hard time defending it.
The Tax Layer: UNICAP And The Small Business Exemption
Federal tax law reaches the same conclusion as GAAP on inbound freight, then adds detail. Section 263A of the Internal Revenue Code, the Uniform Capitalization rules known as UNICAP, requires businesses that produce or resell property to capitalize both direct costs and a share of indirect costs into inventory. Inbound freight and handling sit squarely inside that requirement.2Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
Where UNICAP goes further than GAAP is in dictating which indirect costs must be allocated and how, which can push manufacturers to capitalize production overhead that book accounting might expense.
Smaller businesses get a full exemption. Section 263A(i) exempts any taxpayer that meets the gross receipts test in Section 448(c): average annual gross receipts over the prior three tax years at or below an inflation-adjusted threshold.3Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting The statutory base is $25 million, and for tax years beginning in 2025 the threshold is $31 million.4Internal Revenue Service. Rev. Proc. 2024-40
The exemption doesn’t let you ignore inventory accounting. It lets you follow your regular financial accounting method without the extra UNICAP layer on top.
Fixing A Past Misclassification
If you’ve been expensing inbound freight instead of capitalizing it, or you’ve been applying UNICAP incorrectly, you can’t just start doing it right next period. The IRS treats any change to how you account for inventory costs as a change in accounting method, which means filing Form 3115 and getting IRS consent.5Internal Revenue Service. About Form 3115, Application for Change in Accounting Method
Form 3115 includes a Section 481(a) adjustment, a catch-up calculation for the cumulative effect of the change across all prior years. If you’d been deducting freight too early by expensing it, the adjustment increases taxable income in the year of change. If you’d been overstating inventory, it goes the other way. Businesses crossing the gross receipts threshold into or out of UNICAP use the same form to make the transition.6Internal Revenue Service. Instructions for Form 3115
The filing requirement applies even when you’re correcting an obvious mistake. Quietly switching methods isn’t an option; the IRS wants the transition tracked and the tax effect accounted for.