COGS Calculator

The COGS formula is beginning inventory + purchases + direct costs − ending inventory. In the example, $25,000 + $60,000 + $2,000 − $20,000 = $67,000.

COGS is the cost of the products you sold in the period. Yes, it is an expense: it is the first cost subtracted from revenue, and what remains is gross profit. The IRS asks you to figure gross profit before you deduct other business expenses.

The cost of goods bought for resale, freight-in, and for goods you make, materials, direct and indirect production labor and factory overhead. The IRS notes that retailers and wholesalers usually have no labor to include. Store rent, marketing and office wages are operating expenses, not COGS. Sole proprietors do not include amounts paid to themselves.

Sole proprietors figure it in Part III of Schedule C (Form 1040), lines 35 to 42, and carry it to line 4. Corporations and partnerships filing Form 1120, 1120-S or 1065 use Form 1125-A. A small business taxpayer (average annual gross receipts of $31 million or less for the 3 prior tax years, per Pub 334 for 2025 returns) can choose not to keep an inventory.

Yes. The method you use to identify cost decides which purchase prices end up in ending inventory, and so in COGS. The IRS allows specific identification, FIFO or LIFO, and values inventory at cost, at the lower of cost or market, or by the retail method. When prices rise, FIFO usually gives lower COGS than LIFO. Use the same method every year.

Often not. The IRS says you do not have to figure cost of goods sold if selling merchandise is not an income-producing factor in your business. Some firms still track cost of services, such as contractor labor tied to each job.