I sell freight, pay carriers to move freight, & make profit on the difference. Do I deduct my carrier services as COGS? Carrier charges are services.

[gking]

My carrier charges are service charges, but are directly related to the gross income I invoice out.  I am concerned that as my gross sales goes up, my risk for audit goes up.  But, my real income (netting out the carrier cost) is pretty low.  I want to minimize audit risk, but want to be legal and correct for reporting.  I keep detailed records of each shipment, i.e. invoice out amount, and direct carrier cost for each shipment.  I was thinking maybe I should be reporting the gross income as my "net income" after I deducted the direct carrier cost without showing COGS or carrier costs on the tax returns.  Then only deduct the overhead and normal costs of business below the COGS lines on schedule C.

Or - do I just count the carrier service as COGS because it is a cost of services?

Thanks

[RichardK · Accepted solution]

My recommendation would be to identify that you are in the transportation industry and report gross income and transportation expense and avoid using cost of goods sold. The two issues with using cost of goods sold are: 1) you are not carrying inventory, and (2) you are not selling goods (you are selling services).