For U.S. federal income taxes, where you report cost of goods sold (COGS) depends on the return your business files. A sole proprietor generally calculates it on Schedule C; certain corporations and partnerships that claim a COGS deduction attach Form 1125-A. In either case, COGS generally starts with beginning inventory plus qualifying costs and subtracts ending inventory—but the form, line numbers, and inventory rules differ. The line references below are for the 2025 Schedule C guidance and the November 2024 revision of Form 1125-A; check the form and instructions for your filing year.
Choose the reporting route for your federal return
| Business filing route | Where COGS is calculated | Where the result goes |
|---|---|---|
| Sole proprietor filing Schedule C | Schedule C lines 35–42, as described in IRS Publication 334 (2025) | Schedule C line 4, using the line 42 result |
| Filers of Forms 1120, 1120-C, 1120-F, 1120-S, 1065, or 1065-B claiming a COGS deduction | Attach Form 1125-A; its line 8 calculates COGS | The appropriate line on the business return; see the current return instructions |
The IRS lists the returns that require Form 1125-A when the filer reports a COGS deduction on its About Form 1125-A page. Confirm that list and the applicable form revision for your filing year. These are federal reporting routes, not instructions for state or local returns.
Calculate COGS on Schedule C
For the 2025 Schedule C layout described in IRS Publication 334, complete lines 35 through 42. The calculation begins with inventory at the start of the year, adds the listed costs, then subtracts inventory remaining at year-end.
- Line 35 — Beginning inventory. Enter the value of inventory at the start of the tax year.
- Line 36 — Purchases. Enter purchases, less items withdrawn for personal use.
- Line 37 — Cost of labor. Include qualifying labor costs, not amounts you paid yourself.
- Line 38 — Materials and supplies. Enter the applicable materials and supplies costs.
- Line 39 — Other costs. Enter other costs included under the form’s instructions.
- Line 40 — Total. Add lines 35 through 39.
- Line 41 — Ending inventory. Enter the value of inventory at the end of the tax year.
- Line 42 — COGS. Subtract line 41 from line 40, then carry the result to Schedule C line 4.
Use the applicable tax-year Schedule C and instructions rather than assuming line numbers stay the same. IRS Publication 334 (2025) explains the Schedule C calculation and its inventory context.
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Calculate COGS on Form 1125-A
For the November 2024 revision of Form 1125-A, enter beginning inventory on line 1 and report the applicable costs on lines 2 through 6. Line 7 is ending inventory. Line 8 subtracts line 7 from line 6; enter the result on the appropriate line of the return. Form 1125-A includes purchases, labor, additional section 263A costs, and other costs in its calculation, so do not copy Schedule C line entries mechanically.
Attach Form 1125-A when required for the return you file and claim a COGS deduction. Check the current Form 1125-A and the instructions for your business return before filing; form revisions and filing requirements can change.
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Check whether inventory rules apply to your business
Inventory rules are relevant to manufacturers, wholesalers, retailers, and other businesses that make, buy, or sell goods to produce income. A personal-service business—such as a doctor, lawyer, carpenter, or painter—ordinarily is not covered by the inventory chapter in Publication 334 unless it also sells or charges for materials and supplies normally used in its work. Some qualifying small-business taxpayers may also use different inventory treatments. Whether an exception applies depends on the taxpayer and the applicable tax-year rules.
The 2025 Schedule C instructions define a small-business taxpayer, for the treatment discussed there, as one with average annual gross receipts of $31 million or less for the three prior tax years, indexed for inflation, and that is not a tax shelter. This is a tax-year-specific eligibility threshold, not a general COGS limit or a permanent amount. Review the 2025 Instructions for Schedule C and Publication 334 to determine whether the rules fit your situation.
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Review valuation and accounting-method issues
Inventory valuation and the accounting method used to track inventory can affect reported COGS. Form 1125-A asks about inventory valuation methods, LIFO, section 263A, and changes in how inventory quantities, costs, or valuations are determined; it calls for an explanation of changes. The 2025 Schedule C instructions also discuss inventory methods for small-business taxpayers and say to file Form 3115 to change an inventory accounting method.
- Do not assume a small-business exception applies without checking its eligibility rules.
- Do not change inventory methods or valuations casually; the proper treatment depends on your facts and filing history.
- If you are considering a method change or are unsure how section 263A, LIFO, or inventory valuation applies, consult a tax professional familiar with inventory accounting.
The forms and publications cited here explain federal reporting, but they do not determine which costs are deductible or which accounting method is right for a particular taxpayer.
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Before you file
- Identify the business entity and the federal return it files.
- Use the form and instructions for the tax year being reported.
- Reconcile beginning inventory, qualifying costs, and ending inventory using the applicable form’s line structure.
- Check whether Form 1125-A is required or whether your business qualifies for a different inventory treatment.
- Review any inventory valuation or accounting-method change and provide explanations required by the form.
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