Did you have the Schedule C form in front of you when you asked those questions? If not, take a look at one now:
And the instructions:
I'm guessing the inventory question has to do with part III cost of Goods sold.
1. I have a lot of gemstones that I tumbled from raw - I have been 'valuing' them when I make creations between $3 to $5 per stone. Is this the amount I use per stone when figuring my inventory? For example, 50 stones at $5 for a total of $250.
You are probably using the cash method of accounting. If you aren't, you probably should be because it's simple and limits your risk of an audit (my opinion, anyway).
That means you have to value your gemstones at cost, which is what you paid for them during the tax year that you bought them.
2. I have several finished creations that have not yet sold. How do I figure the costs of these creations in inventory? Supplies and materials only? Supplies, materials, labor and profit? For example, supplies and materials are $5, labor (myself) is $15; retail price for creation is $45. Do I only use the $5 or do I use the $45 (retail price)?
The cost of supplies and materials only (line 38).
You don't include the cost or value of your own labor or profit in that section.
3. I have many stones that were given to me. I put a value on them on what it would cost me to REPLACE them, for example, $5 per stone. If I had 25 stones at $5 for a total of $125 - can I claim them in my inventory even though I did not 'buy' them myself?
Your cost for the stones is zero so you don't include them in the inventory.
Please read the instructions carefully and look for other business related publications on the IRS website.
If this is your first year in business, I suggest you have a tax pro prepare your returns the first time so you have the proper format to follow in future years if you want to do it yourself.
Watch this thread for Taxagent to explain it further or correct me if I got something wrong.