Where to Find Cost of Goods Sold on Your Tax Return

Cost of goods sold sits near the top of the income section of your business return, but the exact line depends on how the business is organized. Sole proprietors and single-member LLCs report it on Line 4 of Schedule C, with the underlying calculation shown in Part III (Lines 33–42). C-corporations, S-corporations, and partnerships report it on a separate attachment, Form 1125-A, and the total carries to Line 2 of the main entity return. In every case, the figure is subtracted from gross receipts to produce gross profit before any other deductions.

Schedule C: Sole Proprietors and Single-Member LLCs

If you file a Schedule C with your Form 1040, look at Line 4 of Part I. That is where the COGS total appears, and the IRS subtracts it from gross receipts on Line 5 to give you gross profit.¹

The number on Line 4 is calculated in Part III of the same schedule, on Lines 33 through 42. Part III asks for beginning inventory, purchases (less anything withdrawn for personal use), cost of labor, materials and supplies, and other production costs. Those figures are totaled, and ending inventory is subtracted to produce the COGS amount that flows up to Line 4.¹

One line to read carefully: Line 37 (cost of labor) instructs sole proprietors not to include amounts paid to themselves. Owner compensation does not belong in COGS on a Schedule C.

Form 1125-A: Corporations, S-Corporations, and Partnerships

Entities that file Form 1120, Form 1120-S, or Form 1065 do not compute COGS on the face of the return. They attach Form 1125-A, which is required whenever the entity claims a COGS deduction.² The form runs eight lines:

Line 1: Beginning inventory
Line 2: Purchases
Line 3: Cost of labor
Line 4: Additional Section 263A costs, where applicable
Line 5: Other costs
Line 6: Total of Lines 1 through 5
Line 7: Ending inventory
Line 8: COGS (Line 6 minus Line 7)

The Line 8 total transfers to Line 2 of page one of the entity’s main return, whether that is Form 1120, Form 1120-S, or Form 1065.³⁴ So if you are reading a corporate or partnership return and want the headline number, check Line 2 of page one; if you want the breakdown behind that number, turn to the attached Form 1125-A.

When the Return Won’t Show a COGS Figure

Service Businesses

If selling merchandise is not an income-producing factor in your business, you skip the COGS section entirely and gross profit equals net receipts. That covers most consultants, freelance designers, attorneys, accountants, therapists, and similar professionals.⁵ A Schedule C for a service business will typically leave Line 4 and Part III blank.

Small Business Taxpayer Exception

Even businesses that sell products may not report inventory in the traditional way. Under Section 471(c), a business that meets the gross receipts test in Section 448(c) can treat inventory as non-incidental materials and supplies, or follow the method used on its financial statements or internal books.⁶ For tax years beginning in 2026, the threshold is average annual gross receipts of $32 million or less over the prior three years.⁷ The statutory figure started at $25 million and adjusts annually for inflation.⁸ Tax shelters are excluded regardless of revenue. Qualifying businesses using this method are also exempt from the Uniform Capitalization rules in Section 263A.

What Feeds the Number

The inputs on Schedule C Part III and Form 1125-A are essentially the same, so reading either breakdown works the same way.

Beginning inventory. The value of goods on hand at the start of the tax year. It should tie exactly to the prior year’s ending inventory; a mismatch invites a follow-up from the IRS.

Purchases. Everything bought for resale or as raw materials during the year, reduced by anything withdrawn for personal use.

Cost of labor. Wages paid to employees directly involved in producing or assembling the goods. On Schedule C, the owner’s own labor is excluded. On Form 1125-A, officer compensation is generally reported elsewhere on the entity return rather than on Line 3.

Materials, supplies, and other costs. Items consumed in production, plus expenses like freight to bring raw materials in. Businesses subject to Section 263A also capitalize certain indirect costs, such as storage, handling, and allocable overhead.⁹

Ending inventory. The value of unsold goods at the close of the tax year, based on a physical count or a reliable estimation method reconciled to an actual count.⁶ This figure becomes next year’s beginning inventory.

Inventory Valuation Disclosure

Both Schedule C and Form 1125-A ask you to identify the method used to value closing inventory. The IRS permits two valuation approaches: cost, or the lower of cost or market.¹⁰ Cost values inventory at what you paid, including required capitalized costs. Lower of cost or market compares each item’s historical cost with its current replacement cost on the inventory date and uses the lower figure.

The form also asks how you identified which items were sold and which remain:

FIFO (first-in, first-out): assumes the oldest items were sold first; ending inventory reflects your most recent purchases.
LIFO (last-in, first-out): assumes the newest items were sold first; ending inventory reflects your oldest purchases.
Specific identification: tracks the actual cost of each individual item, practical for unique or high-value goods.

The IRS requires consistency from year to year. A change in method has to be disclosed on the return and may require filing Form 3115.¹¹

1
Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss From Business
2
Internal Revenue Service. About Form 1125-A, Cost of Goods Sold
3
Internal Revenue Service. Form 1125-A – Cost of Goods Sold
4
Internal Revenue Service. Form 1065 (2025)
5
Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business
6
Office of the Law Revision Counsel. 26 USC 471 – General Rule for Inventories
7
Internal Revenue Service. Internal Revenue Bulletin: 2025-45
8
Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting
9
Internal Revenue Service. Section 263A Costs for Self-Constructed Assets
10
Internal Revenue Service. Lower of Cost or Market
11
Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods