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
COGS is subtracted from gross receipts to calculate gross profit
Gross profit affects taxable income
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