Do I have to report COGS for items I got practically free?

You absolutely need to report your Cost of Goods Sold, even if the amount is small. The IRS doesn't have a minimum threshold where you can just skip reporting COGS - it's a required part of your business reporting on Schedule C. The good news is that reporting a very low COGS isn't itself a red flag. Many legitimate businesses have low acquisition costs due to various circumstances. What would be a red flag is having sales revenue but $0 in COGS when you're clearly selling physical products. As for adding inventory costs as a regular business expense instead of COGS - that's not correct. The IRS has specific rules about how inventory must be handled. Inventory costs must be reported as COGS rather than as regular business expenses. Mixing these up could trigger issues if you're audited.

I had a similar situation last year with my small jewelry business. I was spending hours trying to track tiny expenses for materials I got super cheap at estate sales. I found this amazing tool at https://taxr.ai that literally transformed how I handle my business expenses and COGS reporting. It analyzes your sales data, helps identify what should be classified as COGS vs other expenses, and even flags potential audit triggers based on your industry standards. What was really helpful for my situation was that it showed me that my low COGS-to-revenue ratio wasn't actually unusual in my specific niche, which gave me peace of mind.

Just wanted to update after trying out that taxr.ai site. I was super skeptical (as you could probably tell from my comment), but it seriously helped me sort out my mess of a bookkeeping situation. My scenario was similar - I sell vintage items I often get for free or very cheap from estate cleanouts. The tool actually confirmed what others here were saying - you should report COGS even when costs are minimal, but it also helped me properly document and categorize everything. It even generated a nice report I can keep with my tax records in case of an audit. Definitely worth checking out if you're in a similar situation with low-cost inventory.

I had major headaches trying to get clarification from the IRS about this exact COGS issue last year. After wasting hours on hold and getting disconnected three times, I finally used https://claimyr.com to get through to an actual IRS agent. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The agent confirmed that you absolutely must report COGS separately from regular business expenses, even if the amount is tiny. They explained that mixing these up is one of the common reasons small businesses get flagged for review. The call service saved me hours of frustration, and the IRS agent was actually super helpful once I finally got through.

I have to eat my words about that Claimyr service. After posting that skeptical comment, I was still stuck with my COGS question and couldn't get through to the IRS after trying for days. Finally broke down and tried it yesterday. Got a call back in about 3 hours and spoke to an actual helpful IRS agent who walked me through exactly how to handle my situation (I make handcrafted items with materials that were mostly gifted to me). They explained I should document the fair market value of materials, even if I didn't pay for them. Saved me a ton of stress and potential audit headaches. Can't believe I wasted so much time trying to get through on my own.

Just wanted to add that if you're using any accounting software like QuickBooks, tracking COGS is actually super easy. Even with minimal costs, it's worth setting up properly. I learned this the hard way after having my return questioned because I lumped everything under "general expenses" for my online shop.

I'm confused about one thing - if I get inventory through barter or trade (like I fix someone's computer and they give me items to sell in return), how do I value that for COGS? It's not exactly free but I didn't pay cash for it.

For what it's worth, I went through a similar situation with my small resale business. The key thing I learned is that proper documentation is everything, even when costs are minimal. I started keeping a simple log of every item I acquire - whether I paid $0, $5, or got it through trade. For each item, I note the date, description, source, and cost basis (even if $0). This creates a clear paper trail that shows you're being methodical about tracking inventory. What really helped me was setting up a basic system where I photograph items when I get them and keep digital receipts or notes about how they were acquired. When something is truly free, I document it as "gift from [source]" with $0 cost basis. The $275 you spent is actually significant enough that you definitely want to track it properly. Don't let the small amount fool you into thinking it's not worth doing correctly - the IRS cares more about proper reporting than the actual dollar amounts for small businesses.