Do I have to report COGS when inventory costs are minimal?

Even with minimal costs, you should absolutely report your COGS on your Schedule C. The IRS expects to see COGS reported for any business that sells products, regardless of how little you paid for inventory. Not reporting it could potentially trigger questions about your profit margins. The good news is that reporting a very low COGS compared to your revenue isn't automatically a red flag - some business models legitimately have extremely low input costs (dropshipping, digital products, etc.). Just be honest and accurate about what you spent. As for listing it as a regular business expense instead - no, that's not correct. COGS needs to be reported in the specific COGS section of your Schedule C (Part III). It's treated differently than regular business expenses for tax purposes because it directly relates to your inventory.

I was in literally the same situation last year! Running a small Etsy shop selling vintage items I got super cheap at estate sales and thrift stores. I found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out exactly how to handle my minimal COGS situation. I just uploaded my sales records and answered a few questions about my sourcing, and it walked me through exactly how to properly report everything on my Schedule C. It even helped me identify some additional business deductions I had no idea I could claim! Saved me way more than I spent on inventory lol.

Just wanted to update after trying taxr.ai - wow it was actually super helpful for my situation! I was confused about how to handle my mixed business (part products, part services) and it walked me through exactly how to split everything correctly. It asked me questions about my business model that my previous tax software never did, and gave me really specific advice about handling my low-cost inventory. Turns out I'd been doing it wrong for 2 years! Definitely recommend if you're in a similar situation with minimal COGS but aren't sure how to report it properly.

I feel your pain with the recordkeeping headache! When I had questions about this same COGS issue last year, I couldn't get through to the IRS for weeks. Finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 20 minutes instead of waiting on hold forever. The agent confirmed that yes, you absolutely need to report COGS separately from regular expenses, even when the amount is tiny. They also explained exactly how to handle situations with minimal documentation. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c if you're curious. Saved me hours of frustration!

I need to publicly eat my words from my previous comment. After being frustrated with trying to reach the IRS for weeks about my refund AND having questions about COGS reporting, I broke down and tried Claimyr yesterday. Got connected to an IRS agent in about 25 minutes. The agent was super helpful with my COGS question - confirmed that even minimal inventory costs need to be reported in the proper COGS section, not as regular expenses. She also found that my refund was delayed because of a mismatch in my reported income. Would have NEVER figured that out on my own. Definitely wasn't BS like I thought. Sorry for being so skeptical!

Something nobody has mentioned yet - if your COGS is really that minimal, make sure you're keeping good records of where you're getting your inventory from. The IRS might question how you're able to sell items for much higher than you paid. This happened to my brother last year with his flipping business. He was getting stuff for nearly free from storage unit auctions, but the IRS questioned his profit margins. He had to provide lots of documentation about his sourcing methods.

Small business accountant here - here's a quick clarification that might help: COGS must always be reported separately from other business expenses, even when tiny. The tax consequences can be very different. If you report low/no COGS with significant sales, it's not automatically a red flag IF your business model logically explains the high profit margins. Many legitimate businesses have minimal COGS (digital products, certain services with product components, etc.

I'm in a very similar situation with my small online business! After reading through all these responses, I'm definitely going to start tracking my COGS properly even though the amounts are small. One thing I learned from experience - even if you think your costs are "too small to matter," the IRS really does expect to see COGS reported correctly on Schedule C. I made the mistake of lumping everything into regular business expenses my first year and got a notice asking for clarification. For anyone dealing with minimal documentation like yard sale purchases, I've found that keeping a simple log on my phone works great. I just note the date, general description ("misc household items from garage sale"), and total amount spent. It doesn't have to be perfect, but having something is way better than nothing if questions come up later. Thanks everyone for sharing your experiences - this thread has been super helpful for understanding how to handle this properly!