How does cost of goods sold work for items you resell?
Cost of goods sold is the cost of the inventory you actually sold in the year: opening inventory, plus purchases less items you took for personal use, plus costs such as freight-in on merchandise you bought, minus your inventory at the end of the year. It comes off net receipts to give gross profit, before business expenses such as fees and supplies, and to figure it the IRS says you must value your inventory at the beginning and end of each tax year, though small business taxpayers can choose another method.
General information from IRS sources, not tax advice. It doesn't say what you should file; check with a tax professional about your own situation.
Checked against the IRS and eCFR pages listed below on .
What the IRS says
"If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C (Form 1040)."
"Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold."
"For merchandise purchased during the year, cost means the invoice price minus appropriate discounts plus transportation or other charges incurred in acquiring the goods."
"If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale."
"Consignments of merchandise to others to sell for you are not sales."
Schedule C, lines 35 to 42
| Line | What it is | Notes for a reseller |
|---|---|---|
| 35 | Inventory at beginning of year | The cost of merchandise on hand at the start of the year, usually last year's closing inventory. Publication 334 says to explain any difference in an attached schedule |
| 36 | Purchases less cost of items withdrawn for personal use | The cost of all merchandise you bought for sale, at the prices you actually paid after trade discounts, minus anything you took for yourself |
| 37 | Cost of labor | Publication 334 says small merchandisers usually don't have labor costs that can properly be charged to cost of goods sold |
| 38 | Materials and supplies | Those used in manufacturing goods. Supplies not used that way are deducted as a business expense when you use them |
| 39 | Other costs | Includes freight-in on merchandise you purchase for sale |
| 40 | Add lines 35 through 39 | The cost of the goods available for sale during the year |
| 41 | Inventory at end of year | Closing inventory, which usually becomes next year's opening inventory |
| 42 | Cost of goods sold | Line 40 minus line 41; it carries to line 4 |
What counts in an item's cost
Publication 538 says the cost of merchandise bought during the year is the invoice price minus appropriate discounts plus transportation or other charges to acquire it. Publication 334 says to use the prices you actually pay, after trade discounts, and that cash discounts can either be credited to a separate account or taken off total purchases, as long as you are consistent.
Shipping to your buyers is a different cost from freight-in. Publication 334 says containers that aren't an integral part of the product are shipping or selling expenses, and the Schedule C instructions mention postage under line 18.
Goods on consignment
Publication 334 says consigning merchandise to others to sell for you isn't a sale: title stays with you, you have no profit or loss until the consignee sells it, and merchandise you have shipped out on consignment stays in your inventory until it is sold. The inventory regulation, 26 CFR 1.471-1, likewise lists goods out on consignment among the goods a seller includes in inventory.
Going the other way, merchandise you receive on consignment doesn't go in your inventory. Publication 334 says you include your profit or commission in income when you sell the merchandise or when you receive the profit or commission, depending on your accounting method.
Theft, damage and disasters
Publication 538 says a casualty or theft loss of inventory is claimed either through a higher cost of goods sold, by reporting opening and closing inventories properly, or separately as a casualty or theft loss, but not both. Through cost of goods sold, any insurance or other reimbursement is taxable; claimed separately, the loss is reduced by the reimbursement you receive or expect to receive.
A quick accuracy test
Publication 334 suggests dividing gross profit by net receipts and comparing the percentage with your usual markup. A large difference may mean sales, purchases, inventory or another cost wasn't figured accurately.
Worked examples
A year of numbers
A seller who keeps an inventory fills in Part III. Gross receipts were $14,000 and returns and allowances $300, so net receipts are $13,700 and gross profit is $7,540, or 55.0% of net receipts.
| Line | Amount |
|---|---|
| 35, opening inventory | $1,200 |
| 36, purchases of $6,500 less $40 of books kept to read | $6,460 |
| 39, freight-in on two wholesale lots | $150 |
| 40, total | $7,810 |
| 41, closing inventory | $1,650 |
| 42, cost of goods sold | $6,160 |
One paperback
A paperback you paid $2.00 for sells for $14.00. The $14.00 is a gross receipt and, if you keep an inventory, the $2.00 is part of cost of goods sold in the year it sells. The platform's fee on the sale isn't part of the book's cost: the Schedule C instructions handle commissions and fees on line 10.
Records placed with a shop on consignment
You place 20 records that cost you $60, or $3.00 each, with a shop that sells them on consignment. By December 31, 12 have sold. The 8 unsold records, $24 at cost, are still yours and still in your closing inventory, even though they sit in the shop.
Edge cases
- Keeping an item for yourself: Publication 334 says to take its cost out of purchases.
- Selling other people's goods for a cut: merchandise you receive on consignment isn't your inventory, and only your profit or commission is your income, Publication 334 says.
- Donated inventory has its own rules: see donating unsold inventory.
- Small business taxpayers aren't required to apply the uniform capitalization rules and can choose not to keep an inventory: see do small resellers have to keep inventory.
- Publication 334 says inventory practices must be consistent from year to year.
What to do
- Count and value what's on hand at year end. Publication 334 suggests inventory forms with columns for description, quantity, unit price and value.
- Record each lot's cost when you buy it, including freight-in.
- Note items you pull for personal use.
- Check with a tax professional about the inventory method that fits your business.
Questions
Is an item's cost deducted when I buy it or when I sell it?
If you keep an inventory, through cost of goods sold: unsold items are in closing inventory, so their cost waits until they sell. Small business taxpayers have other options, covered on do small resellers have to keep inventory.
Do selling fees go in cost of goods sold?
The Schedule C instructions handle commissions and fees on line 10, outside Part III. See are selling fees deductible.
What if some of my inventory won't sell?
Publication 538 says goods you can't sell at normal prices are valued at their bona fide selling price minus the direct cost of disposition.
General information, not tax advice
This page summarizes IRS publications, instructions and guidance as read on . It doesn't say what you should file or deduct. Tax rules depend on your facts, and state rules aren't covered here (see state rules). Check with a tax professional.
Sources
Every figure, rule and quote on this page comes from one of these official pages.
- Publication 334 (2025), Tax Guide for Small Business (IRS, page reviewed or updated Apr 30, 2026; read Oct 19, 2026)
- Instructions for Schedule C (Form 1040) (2025) (IRS, page reviewed or updated Apr 30, 2026; read Oct 19, 2026)
- Publication 538 (01/2022), Accounting Periods and Methods (IRS, page reviewed or updated Apr 30, 2026; read Oct 19, 2026)
- 26 CFR 1.471-1, Need for inventories (eCFR) (eCFR, up to date as of Oct 15, 2026; read Oct 19, 2026)
Free 1-page Reseller Cheat Sheet: fees on 8 platforms, Media Mail and stamp prices
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