When you have inventory that you sell only the amount of inventory that is sold is what is used to figure your profit. What you pay for the inventory you sell is called your cost of goods.
To figure your cost of goods for the year you take what you have on hand at the beginning of the year, add your purchases and subtract your inventory at the end of the year to find how much of the inventory was used in the year.
For example, in the year you start with zero, purchase say $10,000 and your count of the cost of what you have on hand at December 31 was $6,000 it would mean that you had $4,000 cost of goods sold.
The cost of goods sold is subtracted from your sales receipts to get your gross profit. Expenses of operations (other than cost of goods) are subtracted from your gross profit to get your net profit. You pay tax on your net profit each year.
If in your first year you had sales of $7,000 then subtract your cost of goods of $4,000 (as above) for a gross profit of $3,000. If your other expenses were $1,000 than your net profit after subtracting the $1,000 expenses is $2,000. You will owe income tax and self-employment tax on the $2,000.
So you can see that you do not count the inventory as an expense until you sell (or dispose) of it. You also do not pay tax until you have gotten the receipts from the sale.
Please note that it is important to count and value your inventory at the end of the year for correctly figuring your taxes (and maybe more often for accurate management reports).
Building inventory does not result in taxable income. You pay tax on the sales less cost of goods less other expenses.
For more details and links see http://www.irs.gov/businesses/small/article/0,,id=109807,00.html