Cost of goods sold on IRS Schedule C represents the direct costs associated with producing or acquiring products that a business sells during the tax year. This section adjusts gross receipts to arrive at gross income before business expenses are applied.
What Cost of Goods Sold Represents
Cost of goods sold includes costs directly tied to products sold, such as inventory purchases and production-related costs. These amounts are separated from other business expenses to reflect how product-based businesses generate income.
Where Cost of Goods Sold Appears on Schedule C
Cost of goods sold is calculated in Part III of Schedule C and then carried to Part I to adjust gross receipts. This placement connects inventory-related costs with income reporting. A detailed explanation of how these parts interact is provided in Schedule C Line-by-Line Explanation.
Cost of Goods Sold Versus Business Expenses
Not all costs incurred by a business are included in cost of goods sold. Costs that are not directly related to producing or acquiring products are generally reported as business expenses in Part II. How expenses are defined and categorized is explained in Business Expenses in Schedule C.
Effect on Gross Income
Cost of goods sold reduces gross receipts to arrive at gross income, which then serves as the starting point for applying business expenses. How income flows through the form is explained in Gross Receipts and Business Income and How to Complete IRS Schedule C.
Businesses That Use Cost of Goods Sold
Cost of goods sold is commonly reported by businesses that sell products, manufacture goods, or maintain inventory. Service-based businesses may not use this section if they do not have inventory or product costs.
Related Topics and Reference
How cost of goods sold affects the overall business result is explained in Understanding Profit and Loss. A general overview of Schedule C is available in IRS Schedule C Overview, and the official definitions and rules issued by the Internal Revenue Service are available in the reference entry at IRS Form 1040 Schedule C.