What is cost of goods sold on the Schedule C?

If your business makes money by manufacturing products, purchasing items for resale, or selling inventory, you may be able to deduct certain costs through Cost of Goods Sold on Schedule C.

Cost of Goods Sold refers to the direct costs of producing or acquiring the products your business sells. Claiming these costs can help reduce your taxable business income.

Keep in mind that expenses included in Cost of Goods Sold cannot also be deducted as regular business expenses. In other words, you can't claim the same cost twice.

Who Needs to Report Cost of Goods Sold?

You may need to complete the Cost of Goods Sold section of Schedule C if your business:

• Manufactures products
• Purchases products for resale
• Maintains inventory
• Sells physical goods to customers

To complete this section, you'll typically need your beginning and ending inventory amounts for the tax year.

What Expenses Are Included in Cost of Goods Sold?

The IRS generally recognizes four main categories of expenses when calculating Cost of Goods Sold:

Cost of Products or Raw Materials

This includes the cost of items you purchase or materials used to make products, including freight or shipping charges related to obtaining those materials.

Storage Costs

Certain storage expenses related to inventory may be included when figuring Cost of Goods Sold.

Direct Labor Costs

These are wages paid to employees who directly produce or assemble products. They can also include employer contributions to pension and annuity plans connected to those workers.

Factory Overhead

Factory overhead includes indirect production costs associated with manufacturing goods.

How Do I Enter Cost of Goods Sold in the Program?

To enter Cost of Goods Sold in the program:

1. Go to Federal
2. Select Income (Select My Forms)
3. Choose Profit or Loss From a Business
4. Select Cost of Goods Sold

You will be prompted to enter information such as:

• Beginning inventory
• Purchases during the year (less items withdrawn for personal use)
• Labor costs
• Materials and supplies
• Other production-related costs
• Ending inventory

Important IRS Rule About Inventory Costs

According to the IRS Uniform Capitalization Rules (UNICAP), certain businesses must capitalize both direct costs and a portion of indirect costs related to production or resale activities.

Examples of indirect costs may include:

• Rent
• Interest
• Taxes
• Storage
• Purchasing
• Processing
• Repackaging
• Handling
• Administrative costs

These rules can affect how inventory-related expenses are reported and calculated for tax purposes.