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Tax filing 6. Tax filing How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Tax filing However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Tax filing This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Tax filing This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Tax filing However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Tax filing If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Tax filing For more information, see chapter 2. Tax filing Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Tax filing These lines are reproduced below and are explained in the discussion that follows. Tax filing 35 Inventory at beginning of year. Tax filing If different from last year's closing inventory, attach explanation 36 Purchases less cost of items withdrawn for personal use 37 Cost of labor. Tax filing Do not include any amounts paid to yourself 38 Materials and supplies 39 Other costs 40 Add lines 35 through 39 41 Inventory at end of year 42 Cost of goods sold. Tax filing Subtract line 41 from line 40. Tax filing Enter the result here and on line 4 Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Tax filing If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Tax filing Opening inventory usually will be identical to the closing inventory of the year before. Tax filing You must explain any difference in a schedule attached to your return. Tax filing Donation of inventory. Tax filing If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Tax filing The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Tax filing You must remove the amount of your contribution deduction from your opening inventory. Tax filing It is not part of the cost of goods sold. Tax filing If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Tax filing Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Tax filing For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Tax filing A special rule may apply to certain donations of food inventory. Tax filing See Publication 526, Charitable Contributions. Tax filing Example 1. Tax filing You are a calendar year taxpayer who uses an accrual method of accounting. Tax filing In 2013, you contributed property from inventory to a church. Tax filing It had a fair market value of $600. Tax filing The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Tax filing The charitable contribution allowed for 2013 is $400 ($600 − $200). Tax filing The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Tax filing The cost of goods sold you use in determining gross income for 2013 must not include the $400. Tax filing You remove that amount from opening inventory for 2013. Tax filing Example 2. Tax filing If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Tax filing You would not be allowed any charitable contribution deduction for the contributed property. Tax filing Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Tax filing If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Tax filing Trade discounts. Tax filing The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Tax filing You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Tax filing Do not show the discount amount separately as an item in gross income. Tax filing An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Tax filing Cash discounts. Tax filing Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Tax filing There are two methods of accounting for cash discounts. Tax filing You can either credit them to a separate discount account or deduct them from total purchases for the year. Tax filing Whichever method you use, you must be consistent. Tax filing If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Tax filing For more information, see Change in Accounting Method in chapter 2. Tax filing If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Tax filing If you use this method, do not reduce your cost of goods sold by the cash discounts. Tax filing Purchase returns and allowances. Tax filing You must deduct all returns and allowances from your total purchases during the year. Tax filing Merchandise withdrawn from sale. Tax filing If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Tax filing Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Tax filing You must also charge the amount to your drawing account. Tax filing A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Tax filing As stated above, you also use it to record withdrawals of merchandise for personal or family use. Tax filing This account is also known as a “withdrawals account” or “personal account. Tax filing ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Tax filing Small merchandisers (wholesalers, retailers, etc. Tax filing ) usually do not have labor costs that can properly be charged to cost of goods sold. Tax filing In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Tax filing Direct labor. Tax filing Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Tax filing They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Tax filing Indirect labor. Tax filing Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Tax filing Other labor. Tax filing Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Tax filing Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Tax filing Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Tax filing Those that are not used in the manufacturing process are treated as deferred charges. Tax filing You deduct them as a business expense when you use them. Tax filing Business expenses are discussed in chapter 8. Tax filing Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Tax filing Containers. Tax filing Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Tax filing If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Tax filing Freight-in. Tax filing Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Tax filing Overhead expenses. Tax filing Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Tax filing The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Tax filing Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Tax filing Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Tax filing Inventory at the end of the year is also known as closing or ending inventory. Tax filing Your ending inventory will usually become the beginning inventory of your next tax year. Tax filing Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Tax filing Prev Up Next Home More Online Publications
The International Tax Gap
Find resources on this page pertaining to the international tax gap — the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time. The tax gap can also be thought of as the sum of non-compliance with the tax law.
International Tax Gap Series
The Tax Gap -
News, facts, figures and a fact sheet series on the tax gap in general.
Page Last Reviewed or Updated: 13-Mar-2014
The Tax Filing
Tax filing Publication 584-B - Introductory Material Table of Contents What's New Introduction What's New The IRS has created a page on IRS. Tax filing gov for information about Publication 584-B, at www. Tax filing irs. Tax filing gov/pub584b. Tax filing Information about any future developments affecting Publication 584-B (such as legislation enacted after we released it) will be posted on that page. Tax filing Introduction This workbook is designed to help you figure your loss on business and income-producing property in the event of a disaster, casualty, or theft. Tax filing It contains schedules to help you figure the loss to your office furniture and fixtures, information systems, motor vehicles, office supplies, buildings, and equipment. Tax filing These schedules, however, are for your information only. Tax filing You must complete Form 4684, Casualties and Thefts, to report your loss. Tax filing Prev Up Next Home More Online Publications