The growing popularity of online marketplaces like Amazon, Ebay and Etsy has driven massive growth for retailers of all sizes. Some of these companies operate exclusively through online retail, taking advantage of a worldwide target market that doesn’t carry high expenses.
Despite leveraging the online marketplace, these retail businesses are still required to pay taxes and prepare financial documents like any other company. They also need to account for their inventory and take advantage of tax deductions like any other retailers, including listings of cost of goods sold, or COGS, on their income statements.
Cost of goods sold is the technical accounting term used to describe incurred expenses, either creating or obtaining goods for sale. These would be classified as direct costs and only businesses with a saleable product can list COGS on their income statement.
Cost of goods sold are used to determine sales revenue for the tax year and potential profits. If you need to calculate COGS, take the beginning annual inventory amount, add your goods purchased, and then subtract your year ending inventory from that total.
There’s a number of COGS examples that can be listed;
- Purchase Price Of Goods To Be Resold
- Distribution Costs
- Materials Costs
“Goods” are going to refer to any items purchased with the intent to resell it. It also includes materials and supplies that are used to manufacture a product. Items that have been purchased but returned or used for personal use can’t be included.
Manufacturing and mining businesses can include;
- Cost Of Direct Labor
- Cost Of Indirect Labor
- Supervision Cost
- Rent Cost
- General Shipping
- Maintenance Cost
- Direct Overhead Expenses
- Indirect Overhead Expenses
Your business supplies, if not used for directly or indirectly manufacturing a product, it would have to be deducted separately from your COGS.
COGS For Online Retailers
If you have an online businesses that operates through eBay or Etsy, you’ll be able to claim most of these same costs.
If you have a business that has no real production costs and only engages in the purchasing and reselling of goods over the internet, it may still list the amount spent on purchases as COGS. Packaging may even be included, but only if the packaging is unique and resembles what would appear on physical shelf. The bubble wrap, tape, and cardboard used to deliver your product to a customer would not be COGS.
The Internal Revenue Service allows companies to deduct the COGS for any products they either manufacture themselves or purchase with the intent to resell. This deduction is available to any business that lists COGS on its income statement, including manufacturers, wholesalers, and retailers. It doesn’t matter if they have a physical location or a virtual online store.
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