How To Figure Cost of Goods Sold
Table of Contents * Introduction * Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 * Line 35 Inventory at Beginning of Year * Line 36 Purchases Less Cost of Items Withdrawn for Personal Use * Line 37 Cost of Labor * Line 38 Materials and Supplies * Line 39 Other Costs * Line 40 Add Lines 35 through 39 * Line 41 Inventory at End of Year * Line 42 Cost of Goods Sold
Introduction
If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. However, to determine these costs, you must value your inventory at the beginning and end of each tax year.
This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you.

If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. For more information, see chapter 2.
Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42
Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. These lines are reproduced below and are explained in the discussion that follows. 35 | Inventory at beginning of year. If different from last year's closing inventory, attach explanation | | 36 | Purchases less cost of items withdrawn for personal use | | 37 | Cost of labor. Do not include any amounts paid to yourself | | 38 | Materials and supplies | | 39 |