Answers · Deductions, assets & depreciation
Cost of Goods Sold Explained
COGS is generally the cost assigned to goods sold during the period under the taxpayer’s inventory/cost method.
How it works
The rule, and what it turns on.
Conceptually beginning inventory + purchases/production costs - ending inventory, subject to required capitalization and method rules.
Example
$20,000 beginning + $100,000 purchases - $25,000 ending = $95,000 preliminary COGS.
Common mistakes
What we see go wrong, and what we do instead.
- Double-counting purchases in COGS and expenses.
A better approach
- Reconcile inventory and purchasing accounts before tax prep.
Authority
Where this comes from, so you can check it.
IRC §§471 and 263A as applicable; Form 1125-A instructions; IRS Publication 334.
Educational information, not individualized tax advice. Treatment depends on your facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
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