Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. These taxpayers can also account for inventoriable items as materials and supplies expense.
- An individual taxpayer must not annually earn more than $1 million, as determined by annual gross receipt amounts for the past three years.
- Their business must also not qualify as a tax shelter.
The COGS account is an inventory account. If you fall within the two guidelines above, you are not required to keep an inventory, and you can treat your supplies as 'Materials/Supplies' expense.
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If you want to use the 'Materials or Supplies' account within the Inventory account (technically, materials and supplies used in production go here), you have to tell TurboTax you have an Inventory asset (it is listed under business/self-employment expenses in TurboTax). You can enter production expenses, such as purchases, materials, or supplies under Cost of Goods Sold which is part of your Inventory. If you don't keep an inventory, you can enter 0 for both beginning and ending inventory amounts. Also, if you don't keep an inventory, the tax effect of recording these expenses under inventory supplies or office supplies is the same.
