How to Include Cost of Goods Sold on a Business Tax Return
COGS Schedule C, Partnership Returns, and Corporate Tax Forms
Cost of goods sold (COGS) is a calculation of the value of a company's inventory, both that which has already been sold and that which remains to be sold. Cost of goods sold also includes all of your costs for making products and shipping them to customers, so it includes the cost of warehouse workers and shipping costs.
COGS is an important part of your business tax return if you make products to sell them or you buy products and resell them. This calculation captures production costs that wouldn't be included in any other way, and these costs reduce your business taxable income.
What's Included in COGS?
Cost of goods sold typically includes goods you purchase for resale, such as if you have a retail business, as well as freight or shipping costs to get them to your location. It includes your costs incurred in storing these items until they are sold and the labor involved in making, storing, and shipping the products.
If you manufacturer or create items for eventual sale, COGS includes all the above costs as well as the components you must purchase to assemble your product.
You can also include indirect warehouse costs such as rent and administrative costs.
Keep in mind that you can't also use a cost of goods sold expense as a business expense tax deduction in the "Expenses" section of your business tax return if you include this expense in the calculation of cost of goods sold.
Calculating Cost of Goods Sold
The process for calculating the cost of goods sold is the same for all business types. Begin by gathering the necessary information. Start with the inventory of products you had at the beginning of the year and then
You'll need to know the inventory valuation method you should use (LIFO, FIFO, or other). You'll need the cost of all associated labor and purchases.
Now you'll do the cost of goods sold calculation. It starts with beginning inventory and adds in the costs of materials and labor sold. It then calculates your ending inventory. The formula is:
- Beginning Inventory Costs (at the beginning of the year)
- Plus Additional Inventory Cost (inventory purchased during the year)
- Minus Ending Inventory (at the end of the year)
- Equals Cost of Goods Sold
Sole Proprietor or Single-owner LLC
Sole proprietors and single-owner LLCs calculate and report their business taxes on Schedule C. The cost of goods sold calculation is in Part III. This calculation is added to other expenses and income to get a net income (taxable income) for the business. This amount is included with other business income on Line 12 of Schedule ! of your 1040. Then the total from Schedule 1 is moved to your 1040 form.
Form 1120 is the U.S. corporate income tax return. Form 1120 is used to calculate the net income, profit or loss, of all incorporated businesses. Cost of goods sold is calculated on Form 1125-A and included on Line 2 of the Form 1120.
Partnership and Multiple-owner LLC
Form 1065, the U.S. Return of Partnership Income, is used to calculate the net income, profit or loss, of partnerships. Cost of goods sold is calculated on Form 1125-A and included on Line 2 of Form 1065.
An S corporation files its business income taxes on Form 1120S. Cost of goods sold is calculated on Form 1125-A and included on Line 2 of Form 1120S.
Limited Liability Company
A single-member LLC (SMLLC) files a business tax return as a sole proprietor using Schedule C. A multiple-member LLC files a business tax return as a partnership using Form 1065.
Do I Need a Tax Professional for Cost of Goods Sold?
If you have a very simple business and the COGS calculation is fairly straightforward, you might be able to do this yourself. The most difficult part is typically the inventory valuation method—LIFO, FIFO, actual, or average—which can be quite complicated. It's always worthwhile to have a tax preparer do at least this part of the calculation and perhaps even to review everything when you've finished.