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What is the Cost of Goods Sold?

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What is the Cost of Goods Sold?


If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your business expenses may be included in figuring cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring cost of goods sold.

  • The cost of products or raw materials, including freight.

  • Storage.

  • Direct labor (including contributions to pension or annuity plans) for workers who produce the products.

  • Factory overhead.


Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

For more information, see the following sources.

  • Cost of goods sold chapter 6 of Publication 334.

  • Inventories Publication 538.

  • Uniform capitalization rules Publication 538 and section 263A of the Internal Revenue Code and the related regulations.

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Views: 1662 Created on: Jun 15, 2013
Date updated: Dec 02, 2021

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