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Sold on Schedule C, Lines 35 Through 42 * Line 35 Inventory at Beginning of Year * Line 36 Purchases Less Cost of Items Withdrawn for Personal Use * Line 37 Cost of Labor * Line 38 Materials and Supplies * Line 39 Other Costs * Line 40 Add Lines 35 through 39 * Line 41 Inventory at End of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
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.
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Line 35 Inventory at Beginning of Year
If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2).
Opening inventory usually will be identical to the closing inventory of the year before. You must explain any difference in a schedule attached to your return.
Donation of inventory. If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.
If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase