Cost of goods sold refers to the direct cost of producing the goods sold by a business.
If your business produces income by manufacturing, selling or purchasing goods, you can deduct some of your expenses in the Cost of Goods Sold section of your Schedule C. In order to complete this section, you will need to input your beginning and ending inventory amounts. Expenses that are included in the Cost of Goods Sold cannot be entered as both business expenses and cost of goods sold expenses.
What are the 4 types of expenses used to figure cost of goods sold?
- Cost of products or raw materials (this includes freight)
- Direct Labor Cost for workers producing products (includes contributions to pensions and annuity plans)
- Factory Overhead
Where to enter cost of goods sold?
To enter cost of goods sold within the program, go to:
- Federal Section
- Profit or Loss from a Business
- Cost of Goods Sold
According to the IRS, ‘Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs’.
Within the program, you will need the beginning inventory, purchases made (minus cost of items withdrawn for personal use), labor costs, materials and supplies, other costs, and ending inventory.
Please refer to the Schedule C instructions, page 15 for more information.
You may also refer to Form 1125-A (Cost of Goods Sold) and instructions.