How to Include Cost of Goods Sold on Business Tax Return
COGS Schedule C, Partnership, and Corporate Tax Forms
Cost of goods sold (COGS) is a calculation of the value of a company's inventory that has been sold and which remains to be sold. COGS is shown in a similar way on each type of business tax return. On each return, cost of goods sold is a reduction in business income, so the higher you can legitimately make cost of goods sold, the less income you will have to pay taxes on.
Calculating Cost of Goods Sold
The process of calculating cost of goods sold is the same for all business types:
- Gather the information needed for this calculation. You will need to know the valuation method, beginning and ending inventory, and the cost of labor and purchases.
- Then do the cost of goods sold calculation, which starts with beginning inventory, adding in costs of materials, labor, and other costs during the end, and then calculating ending inventory.
Where the calculation of cost of goods sold is done depends on the tax return. For Schedule C (for sole proprietors and single-member LLC's), the calculation is done in Part III. For all other business types, the calculation is done on Form 1125-A.
How to Include Cost of Goods Sold on a Business Tax Return
- Schedule C - Profit or Loss From Business for Form 1040 for Sole Proprietors and Single-Member LLCs: Schedule C is used to calculate the net income (profit or loss) of a small business. The calculation is done in Part III, and the result of the calculation of cost of goods sold is shown on Line 4 of Part I.
- Form 1120 U.S. Corporation Income Tax Return: Form 1120-S is used to calculate the net income (profit or loss) of a corporation. The result of the calculation of cost of goods sold is shown on Line 2 of Part I - Income. The COGS calculation is
- Form 1065 U.S. Return of Partnership Income: Form 1065 is used to calculate the net income (profit or loss) of a partnership. The result of the calculation of cost of goods sold is shown on Line 2 of Part I - Income. The COGS calculation is detailed on Schedule A.
- Business Tax Returns for Limited Liability Companies: A single member LLC (SMLLC) files a business tax return as a sole proprietor, using Schedule C. See the information above for including cost of goods sold on Schedule C.
A multiple-member LLC files a business tax return as a partnership, using Form 1065. See the information above for including cost of goods sold on a partnership tax return. Read more about cost of goods sold, including how to calculate this amount and how to keep records for cost of goods sold.
Doing the Cost of Goods Sold Calculation Yourself
If you have a very simple business, and the COGS calculation is fairly simple, you may be able to do it yourself. The most difficult part may be the inventory valuation method (LIFO, FIFO, actual, or average), which can be quite complicated. It's always worthwhile to have a tax preparer do this calculation.