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How To Estimate The Value Of The Cost Of Goods Sold For Tax Purposes

14 May 2015

Danielle Lopez

The IRS allows businesses to deduct various expenses related to the cost of doing business and to lower the amount they might owe in taxes at the end of the fiscal year. One of those deductions concerns the costs of producing, or reselling, goods. The cost of goods sold can be deducted from your annual gross receipts to determine your gross profits (or loss). Here is how you can figure out the value of the costs of goods sold you have sold.

Starting Inventory

You need to inventory all of your goods that are ready for sale at the beginning of your fiscal year. This is the inventory of the products you have made, or purchased for resale, that is ready to be sold at the time you do the inventory. This does not include other inventory in your business like equipment or office supplies – you can only add in those products that you intend to sell to customers in the starting inventory.

Annual Expenses

You need to add up the annual direct costs involved in manufacturing products for sale, or if you are a wholesaler, the costs of purchasing products for resale. The direct expenses you would add together include the direct costs of the materials you bought to manufacture your product, the amount of money in wages and benefits that you paid your workers to create the products, and the amount it cost you to operate the facility and machinery (utility and maintenance costs) used to produce or repackage products for sale.  

You can also deduct some of the indirect costs involved in the manufacturing or wholesale operation. Indirect costs typically include the amount you pay to store the products until they are sold, personnel costs  involved in purchasing materials and products, cost of renting a facility (or the interest on a mortgage for a building you are purchasing), and the costs to repackage goods for resale. The starting inventory and the costs of creating new inventory equals the value of the amount of goods you could have sold over the fiscal year.

Ending Inventory

You need to do an inventory at the end of the fiscal year to figure the costs of goods you still have on hand to sell – this figure will also serve as the starting inventory for the next fiscal year. The cost of the starting inventory plus the cost of annual expenses is deducted from the value of the inventory you have on hand to give you the value of the cost of goods sold. For example, if the starting inventory was valued at a $100, and your annual expenses cost $200, you would have a total annual cost of $300. If the ending value of the inventory was $40, you would subtract $40 from $300 to determine the cost of goods sold ($240).

Contact a local business tax preparation service if you need help setting up a system that works for you.

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