How do I get to cost of goods sold on the Schedule C

[JulieCo]

Here are instructions for accessing the inventory and cost of goods sold section within TurboTax:

1. Within your Federal Return, click the Income & Expenses tab at the top of the screen.
2. Select to Edit or Add the Self Employment business you are working on
3. Select that you want to work on Expenses for this self-employed business
4. Select Inventory.  You will then be brought to screens where you can enter your beginning and ending inventory values, as well as the cost of inventory purchased during the year to calculate your cost of goods sold.  All of this information will then be reported on your Schedule C.

[HavaWorkman]

What if I'm not tracking inventory? From what I understand, I only have to report inventory if I sell more than $1,000,000, and I promise you I don't, lol. So I'd like to enter "Cost of Goods Sold" but I DON'T want to report inventory. How do I do this?

[RobertG]

You don't have to report inventory, but you can't deduct the cost of unsold inventory.

So, if you report cost of goods sold, you must reduce it by the amount of your ending inventory.

If you report it as supplies, don't deduct the cost of inventory until it is sold.

If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income.

"If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid to acquire or produce the inventoriable items treated as materials and supplies in the year in which they are first used or consumed in your operations.”

IRS Publication 538

Unused inventory has not been used or consumed in the business and is therefore not deductible as an expense.  

@HavaWorkman

[HavaWorkman]

Hi, @RobertG – thank you for the quick response! Let me ask a follow-up to make sure that I understand what you're saying, and also to clarify something else:

Let's say that I bought $3500 worth of materials plus $3000 worth of tools and machinery to make my product, and that I sold $250 worth of product. Let's say that I did all of this in 2019. In that case, I can only claim $250 of COGS (cost of goods sold) on my 2019 taxes. Is that correct?

Second, the $3000 worth of tools and machinery are never going to be "consumed" or "sold," so I'm guessing I shouldn't count it as COGS. What should that be categorized under then?

Thank you so much for your help!

[DaveF1006]

Correct on both counts. 

1. $250 will be reported as the Cost of Goods Sold. 
2. Your tools and machinery will either be expense or reported as assets to be depreciated. You can choose to expense the tools and machinery if any of those items are $2500 or less. Turbo Tax will ask you if you wish to make this election under the Safe Harbor Provision.

You can view this Turbo Tax link for more details on this subject.

[Carl]

How do I get to cost of goods sold on the Schedule C

As you can see by what I have circled in red in the below image, you deal with inventory in the inventory section.

If 2019 is your first year dealing with inventory, then you Beginning of Year (BOY) Inventory balance *MUST* be zero.  Your BOY balance for 2019 must match exactly your EOY Inventory balance for 2018. Since you did not deal with inventory in 2018, that 2019 BOY Inventory balance "MUST" be zero. Doesn't matter if you purchased that inventory 50 years ago either. Here's an example of how the Inventory/COGS section works.

BOY Inventory - What *YOU* paid for the inventory in your physical possession on Jan 1 of the tax year. This balance must match the prior year's EOY inventory. So if this is your first year dealing with inventory, the BOY inventory balance must be zero. There are no exceptions.

EOY Inventory - What *YOU* paid for the inventory in your physical possession on Dec 31 of the tax year. Again, it does not matter in what year you purchased that inventory.

Cost of Goods Sold (COGS) - What *YOU* paid for the inventory that you actually sold during the tax year. It flat out does not matter in what tax year you purchased that inventory either.

A few examples:

BOY inventory - $0

COGS - $5000

EOY Inventory - $5000

The above shows you started the year with no inventory in the business. Then during the year you purchased $10,000 of inventory and sold $5000 of that inventory leaving you with an EOY balance of $5000

BOY Inventory $5000

COGS - 3000

EOY Inventory $6000

The above shows you started the year with $5000 of inventory. Note that it also matches the prior year's EOY balance. Then during the year you purchased an additional $4000 of inventory bringing the total inventory for the year to $9000. Then during that same year you sold $3000 of inventory leaving you with an EOY balance of $6000.

The primary reason for a small business to use the invetory/COGS section (even though you're not required to) is so that you can account to the IRS where your money is going that you are deducting from your gross business income. As stated earlier, what *you* pay for inventory is not deductible until the tax year you actually sell that inventory. It flat out does not matter in what year you purchased it.

For your other equipment, those are items used by the business to produce or generate income. The are not inventory by any stretch of the imagination. They are business assets. Business assets and are reported as such in the business assets section. You are required by federal law to depreciate any business asset that is used in the production of income, be it directly or indirectly. So long as you enter these assets in the Business Assets section, and do so correctly, the program will take care of figuring the correct depreciation for you, for each year that asset is "in service" in the business.

[HavaWorkman]

Brilliant!!! Thank you so, so much. That helps tremendously.

[Gmadru83]

I have no cost of goods sold as I aquired stuff free over the years. What do I put on that line. And do I still use a schedule c

[Critter-3]

Yes you use the Sch C and you only enter the income since you have no inventory costs. 

[w1router]

I would like to enter in cost of goods sold. I do not carry inventory.

[ErnieS0]

Cost of goods sold is part of the inventory section whether you carry inventory or not.

Here’s how to enter CGS:

1. Type sch c in Search (magnifying glass) in the top right
2. Tap Jump to sch c
3. Complete the info screen
4. TurboTax will show you a list of recommended expenses based on your type of business
5. If you don’t see Inventory, tap Less Common Items and keep paging through until you find Inventory, then Continue
6. Start Inventory
7. On “Do you have inventory for your Rideshare driving work?” say YES then Continue
8. On “Did you use the cost method to value inventory?” say YES then Continue
9. Leave beginning and ending inventory blank 
10. On “Let’s get the cost of goods for your [business] work" enter your types of costs of goods sold

@w1router