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Level 1

Are packaging costs considered part of Inventory Costs?

 
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Employee Tax Expert

Are packaging costs considered part of Inventory Costs?

The IRS says "Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold.If they are not an integral part of the manufactured product, their costs are shipping or selling expenses."

So if you have a product that you are selling and the packaging for it is what would be included if you were displaying on a store shelf, then it's part of Inventory Costs. For example a pretty velvet box for jewelry is part of inventory costs.

But if you have packaging costs for shipping your merchandise, like shipping boxes and bubble wrap, tape,etc, that is part of shipping costs.

https://www.irs.gov/publications/p334/ch06.html

7 Replies
Employee Tax Expert

Are packaging costs considered part of Inventory Costs?

The IRS says "Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold.If they are not an integral part of the manufactured product, their costs are shipping or selling expenses."

So if you have a product that you are selling and the packaging for it is what would be included if you were displaying on a store shelf, then it's part of Inventory Costs. For example a pretty velvet box for jewelry is part of inventory costs.

But if you have packaging costs for shipping your merchandise, like shipping boxes and bubble wrap, tape,etc, that is part of shipping costs.

https://www.irs.gov/publications/p334/ch06.html

Level 3

Are packaging costs considered part of Inventory Costs?

What if you own an online boutique and you have to ship out all your orders, is that considered COGS? Also, what if I pre-buy a bunch of boxes for future orders, is that considered inventory? If so how do I chart this and or categorize it in the inventory and or chart of accounts?  

Level 20

Are packaging costs considered part of Inventory Costs?

If you manufactured the items and boxed them individually for sale prior to whole selling them then that is added to the basis since it is the cost of manufacturing the product.

In your situation you are boxing them up for shipping ... the cost of shipping supplies are entered as either supplies or shipping costs and NOT in the COGS section.
Level 20

Are packaging costs considered part of Inventory Costs?

COGS (Cost of Goods Sold) section in the TurboTax programs asks for a number of things. Here's the breakdown.

Cost of Purchases - What *you* paid for the product you are selling. This includes all materials that become "a physical part of" the finished product.

Labor Costs - What you paid for someone to manufacture the product from start to finish. This person (or persons(s) *must* have physically touched the product you are claiming costs for in the "Cost of Purchases" box. If you have already reported your labor costs elsewhere, then  you will *NOT* claim those labor costs here. For example, if what you paid a W-2 employee is already included in their W-2, or what you paid a 1099-MISC contractor is already reported and claimed elsewhere, you will *NOT* claim that labor cost here. To do so would be double-dipping.

Materials and Supplies - Items used in the manufacturing or sales prep that do not become a part of the finished product, but are not considered actual raw materials. For example, if you manufacture mirrors one of the last things you're going to do is clean that mirror before you package it. For that you will probably use Windex and paper towels.  The Windex and towels do not become a part of the finished product. It is "consumed" during your manufacturing process. So this is a materials & supply expense. Other examples would include sand paper, abrasive rubbing compounds, etc.

Other Costs to Prepare for Sales - These are costs incurred that are not "a physical part of" the product being sold, yet are necessary in order to sell the product. This includes packaging materials, boxes, containers, displays, shipping costs, etc.

 

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Level 3

Are packaging costs considered part of Inventory Costs?

That's what I thought, but I am getting different information pertaining the "COGS". There is no physically store or shop to purchase our garments. Everything is ordered online and shipped. The boxes necessary to sell the product. We pre-purchase the boxes, inserts and tissue paper aka packaging to save money instead of buying individually. The only thing we charge for is the postage, the packing itself is a cost we acquire.  

Level 20

Are packaging costs considered part of Inventory Costs?

Ok ... you are NOT manufacturing the items ... you buy goods to resell and they come ready to sell. 

 

What you do is package them for shipping AFTER you bought and sold the item ... it is a shipping expense and not part of the COGS.  The shipping items are an expense to be deducted currently. 

Level 20

Are packaging costs considered part of Inventory Costs?

The shipping items are an expense to be deducted currently.

I think you meant "concurrently". 🙂