Cost of Goods Sold (COGS) is the cost of buying or making the products you sold during the tax year.
It represents what the item cost you, not what you sold it for.
COGS is used to calculate your gross profit and is commonly reported on Schedule C or business returns.
📦 What Is Included in COGS?
COGS generally includes direct costs related to the products you sell, such as:
✅ Cost of inventory or merchandise
✅ Raw materials used to make products
✅ Direct labor to produce goods
✅ Shipping or freight to obtain inventory
✅ Packaging required to sell the product
🚫 What Is Not Included in COGS?
COGS does not include general business or operating expenses, such as:
❌ Advertising or marketing
❌ Office rent or utilities
❌ Equipment or tools
❌ Insurance
❌ Personal expenses
These costs are deducted elsewhere as business expenses, not COGS.
🧮 Simple COGS Example
🛒 You run a small online store selling handmade candles.
- You buy supplies and materials for candles: $2,000
- You sell all the candles during the year
✅ Cost of Goods Sold (COGS): $2,000
If:
- Total sales = $5,000
- COGS = $2,000
📉 Gross Profit = $3,000
📊 Why COGS Matters
ℹ️ COGS is subtracted from gross receipts to calculate gross profit
ℹ️ Gross profit affects taxable income
ℹ️ Reporting COGS accurately helps avoid overstating income
🧾 Who Typically Reports COGS?
✅ Retailers and resellers
✅ Manufacturers
✅ Online sellers
✅ Businesses that sell physical products
❌ Most service‑only businesses do not have COGS