Do I have to report COGS on tax return if inventory costs are minimal?
Hey tax folks, I'm trying to figure out if I need to bother with reporting Cost of Goods Sold on my tax return. My situation is that I run a small side business selling items that I get almost entirely for free (through donations, freecycle, family cleanouts, etc). For the whole 2024 tax year, I probably spent less than $150 total on actual inventory purchases. The rest was completely free to me, but I'm making decent sales from these items. It seems pointless to track and report COGS when my actual costs are so minimal compared to revenue. Would the IRS see it as a red flag if I just don't report any COGS? Or would I be better off just lumping that tiny $150 as a general expense somewhere else on Schedule C? I don't want to create problems for myself, but also don't want to overcomplicate things when my costs are basically nothing.
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Dylan Cooper
While it might seem unnecessary because your costs are so low, you should still report your Cost of Goods Sold on your Schedule C. The IRS expects to see COGS for any business that sells products, regardless of how little you paid for inventory. Not reporting COGS when you have a product-based business could potentially raise questions. Even if you acquired most items for free, those items still have a "basis" of zero, which should be reflected in your COGS calculations. The $150 you spent should be included there too, not as a separate expense elsewhere on your Schedule C. COGS is specifically designed for tracking inventory costs, and misclassifying these costs could be problematic.
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Sofia Perez
•Thanks for the info. But if I report zero or very low COGS compared to my revenue, wouldn't that raise more eyebrows than just putting it as supplies or something? I heard somewhere that the IRS gets suspicious of unusually high profit margins.
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Dylan Cooper
•Having an unusually high profit margin isn't automatically a red flag if it's accurate for your business model. Many legitimate businesses have very high margins, especially those dealing with donated or very low-cost goods. The IRS is more concerned with accuracy than with specific profit percentages. Misclassifying inventory costs as general expenses like supplies would be incorrect from an accounting perspective and could potentially cause more issues than simply reporting your actual situation. Being truthful about your business model - that you acquire goods for free or very low cost - is always the better approach.
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Dmitry Smirnov
After struggling with similar COGS issues in my small flipping business, I discovered taxr.ai (https://taxr.ai) which helped me sort through exactly what needs to be reported where. Their system specifically addresses Schedule C questions for small sellers and clarified that even zero-cost inventory should be properly tracked in COGS. I uploaded my purchase records and it properly categorized everything, even identifying which items I got for free vs paid for.
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ElectricDreamer
•Does it help with inventory tracking too? I've got hundreds of items I've picked up for free from estate cleanouts but keeping track of each item's "zero cost" seems ridiculous.
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Ava Johnson
•I'm skeptical about tax software for small sellers. Does it actually handle the weird situations like getting inventory from dumpster diving or family donations? Most software I've tried just assumes traditional retail purchasing.
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Dmitry Smirnov
•It absolutely helps with inventory tracking. I was in the same boat with hundreds of free items, and it lets you batch similar acquisition methods together (like "April Estate Sale Finds - $0"). This saves tons of time versus logging each item individually while still maintaining proper records. For unusual inventory sources, that's actually where it shines compared to generic tax software. It has specific categories for non-traditional acquisition methods including found/salvaged items, gifted inventory, and personal property conversions. It properly handles zero-basis inventory rather than forcing you to enter fake costs.
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ElectricDreamer
Just wanted to follow up about taxr.ai - I finally tried it after our conversation here. It was exactly what I needed for my weird inventory situation! The system let me properly account for all my free marketplace finds while still tracking the few items I actually paid for. My Schedule C finally makes sense and I'm not stressing about COGS calculations anymore.
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Miguel Diaz
If you're still confused after getting contradictory advice about COGS reporting, calling the IRS directly can actually clear things up. I was in the same situation with minimal inventory costs and couldn't get a straight answer online. After wasting hours on hold with the IRS regular line, I found https://claimyr.com which got me connected to an IRS agent in under 20 minutes (they have a demo video at https://youtu.be/_kiP6q8DX5c). The agent confirmed I needed to report COGS even for minimal or zero-cost inventory and explained exactly how to do it on Schedule C.
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Zainab Ahmed
•How does this actually work? Sounds fishy that some website can magically get you through to IRS agents when their lines are constantly jammed.
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Connor Byrne
•No way this works. I've been trying to reach the IRS for weeks about my COGS question. If this actually got you through, they're probably just using overseas call centers pretending to be the IRS. I'd be super careful about giving any personal info.
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Miguel Diaz
•It works through a callback system. You don't stay on hold - instead, they use automated technology to navigate the IRS phone tree and hold in line for you. When an actual IRS agent picks up, you get connected. It's completely legitimate - they never ask for your personal info or tax details. They're definitely connecting to the real IRS. The agent I spoke with verified my identity using the standard IRS verification questions, and I could tell from the background noise and systems they were using that it was a legitimate IRS call center. I was skeptical too until I tried it.
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Connor Byrne
I need to eat my words about Claimyr. After posting that skeptical comment, I decided to try it anyway out of desperation to get an answer about my COGS situation. It actually worked! Got a call back within about 25 minutes and spoke to a real IRS representative who walked me through exactly how to handle my minimal inventory costs on Schedule C. Saved me hours of frustration and guesswork. The agent even sent me to the specific IRS publication section that addresses zero-basis inventory reporting.
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Yara Abboud
For what it's worth, I'm an reseller who gets most inventory from dumpster diving and free piles. I report everything properly on COGS with most items having zero cost basis. Been doing this for 3 years with no issues. The important part is keeping good records of where you acquired items (even if free) and tracking inventory properly. I use a simple spreadsheet with acquisition date, source, cost (often $0), and then selling price when sold.
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Fatima Al-Farsi
•Thanks for sharing your experience! Do you think it's necessary to actually list every single item individually in my records, or would it be acceptable to just categorize them? Like "March freebie batch - $0" rather than "blue lamp - $0, red vase - $0" etc.
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Yara Abboud
•Categorizing is usually fine for low-value items. I personally do batch entries like "Weekend Estate Cleanout Items - $0" with a rough count of items. For anything worth over $50 when sold, I track those individually. The key is having enough detail that you could explain your inventory system if questioned. The IRS is mostly concerned that you're not hiding sales or falsely inflating expenses, not that you have a museum-level catalog of every pencil and paperclip you've picked up for free.
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PixelPioneer
Wait, I thought Schedule C doesn't even have a place for COGS unless you check the inventory box? If you're getting stuff for free, can't you just leave that box unchecked and avoid the whole COGS section entirely?
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Dylan Cooper
•That's not correct. If you're selling products (as opposed to just services), you need to check "Yes" to the inventory question on Schedule C, which then requires you to complete the COGS section. The fact that you acquired inventory for free doesn't change this requirement - those items still count as inventory with a zero cost basis. Trying to avoid the COGS section by incorrectly answering the inventory question would be misrepresenting your business operations and could create problems. The proper approach is to complete the COGS section accurately, even if many of your entries show zero cost.
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