Form 1125-A COGS: What Kind of Expenses Can I Include?
Hey everyone, I'm trying to get my business taxes in order for this year and I'm a bit confused about Form 1125-A for Cost of Goods Sold. I've never had to fill this out before since my business has grown this past year. I sell handcrafted furniture that I make myself, and I'm trying to figure out what kind of expenses I can actually include on this form. Is it just the raw materials like wood and hardware? What about the tools I had to buy? And the space in my garage that I use as a workshop - can any of that count? My revenue this year was about $87,000 and I know I spent at least $32,000 on materials and supplies, but I'm not sure what else I can legally claim as COGS. Any help would be really appreciated!
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Dylan Campbell
This is a good question! Form 1125-A is specifically for calculating your Cost of Goods Sold (COGS), which is basically the direct costs attributable to producing the goods you sold during the year. For your handcrafted furniture business, you can definitely include the cost of raw materials like wood, hardware, finishes, glues, etc. You can also include the direct labor costs if you hire anyone to help with production (but not your own labor if you're a sole proprietor). Other includable costs would be factory overhead directly related to production - things like utilities for your workshop space, depreciation on production equipment, and rent for your workshop space. Tools can be tricky - if they're expected to last more than a year, they're usually considered capital assets that you'd depreciate rather than including directly in COGS. Small tools that wear out quickly might qualify though.
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Sofia Hernandez
•This is really helpful but I'm still confused about workshop space. I use about half my garage for my woodworking. Do I just calculate half of my mortgage/utilities for that? And what about when I use my truck to pick up materials or deliver furniture? Can any of that go on the 1125-A?
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Dylan Campbell
•For your workshop space in the garage, that would actually be better handled as a home office deduction on Schedule C rather than on Form 1125-A. You'd calculate the percentage of your home used for business (based on square footage) and apply that percentage to relevant expenses. For your truck expenses related to picking up materials, those would typically go on Schedule C as well, not on Form 1125-A. You can deduct those business miles using either the standard mileage rate or actual expenses method. Delivery costs could potentially be part of COGS if you're including "delivery" as part of your product cost to customers, but many small businesses find it cleaner to keep all vehicle expenses on Schedule C.
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Dmitry Kuznetsov
I was in a similar situation last year with my small manufacturing business and was completely lost with the 1125-A. I tried using one of those big box tax software programs but kept getting different answers depending on who I asked. I eventually found this service called taxr.ai (https://taxr.ai) that specifically helped me figure out my COGS calculations. You upload your documents and receipts, and they analyze everything to help determine what should be included on your 1125-A versus what should go elsewhere. They even showed me how to properly categorize my inventory at the beginning and end of the year, which I was doing completely wrong!
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Ava Thompson
•How does the document upload work? I have hundreds of receipts from the hardware store and lumber yard. Do I need to scan every single one?
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Miguel Ramos
•Sounds too good to be true honestly. Isnt this just the same as talking to an accountant but probably more expensive?
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Dmitry Kuznetsov
•The document upload is actually pretty straightforward. You don't need to scan every individual receipt - you can take photos of receipts in batches or upload bank/credit card statements, and their system is smart enough to categorize them. I just took pictures of my organized receipt piles and uploaded those along with my bank statements. It's different from just talking to an accountant because they use AI to analyze everything and provide specific recommendations for your situation, plus they show you exactly what goes where on the forms. It ended up saving me money because they found several deductions my previous accountant had missed. I can't speak to everyone's experience, but for my manufacturing business it was definitely worth it.
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Miguel Ramos
I want to follow up about taxr.ai that I was skeptical about earlier. I decided to give it a try because I was desperate with my COGS calculations for my online retail business. I gotta say I was really surprised! The system automatically sorted my expenses between what belonged on 1125-A versus Schedule C, and showed me how much inventory I should be reporting. What impressed me most was that it caught that I was incorrectly categorizing shipping supplies (boxes, tape, etc.) as COGS when they should have been on Schedule C. Saved me from making a pretty big mistake. They also explained which of my storage costs could legitimately go into COGS. Made the whole process way less stressful than last year.
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Zainab Ibrahim
After struggling for WEEKS trying to get someone at the IRS to answer questions about Form 1125-A last year, I stumbled on a service called Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in less than 20 minutes who walked me through exactly what expenses qualified for COGS in my case. If you have specific questions, this might save you tons of time. Check out how it works: https://youtu.be/_kiP6q8DX5c I was about ready to throw my computer out the window after being on hold for hours and getting disconnected three times before I found this.
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StarSailor
•Wait, how is this even possible? The IRS phone lines are impossible to get through - I tried calling for 2 months last year. Does this service actually work?
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Connor O'Brien
•Sounds like a scam. No way they can magically get through IRS queues when millions of people can't. Plus, wouldn't IRS agents just tell you to talk to a tax professional anyway?
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Zainab Ibrahim
•It's not magic - they use a technology that basically waits on hold for you and calls you back when an agent is reached. Kind of like those restaurant apps that hold your place in line. You don't have to sit there listening to the hold music for hours. The IRS agents were actually pretty helpful once I got through. They won't prepare your taxes for you, of course, but they answered my specific questions about which expenses qualified for Form 1125-A in my situation. They clarified the difference between direct materials (which go on 1125-A) and indirect expenses (which typically go on Schedule C). Saved me from making some pretty costly mistakes.
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Connor O'Brien
I need to eat some crow here. After leaving that skeptical comment about Claimyr, I decided to try it myself because I was desperate for answers about my inventory valuation for 1125-A. I was shocked when I got a call back with an actual IRS agent on the line about 35 minutes later. The agent walked me through exactly how to handle my beginning inventory calculation, which materials could be included in COGS, and how to document everything properly. Honestly saved me hours of research and probably prevented an audit. The peace of mind alone was worth it. Sometimes I hate being wrong, but in this case I'm glad I gave it a shot despite my skepticism.
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Yara Sabbagh
Don't forget inventory! Form 1125-A is all about the formula: Beginning inventory + Purchases - Ending inventory = COGS If you have unsold furniture or unused materials at year end, you need to count that as ending inventory. Biggest mistake I see people make is forgetting to properly value their inventory at the beginning and end of the tax year.
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Keisha Johnson
•How do you handle inventory valuation if prices change throughout the year? Like I bought some exotic wood early in the year for $1200 but the same amount would cost $1600 now.
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Yara Sabbagh
•You generally need to choose an inventory valuation method and stick with it consistently. The most common methods are FIFO (First In, First Out) where you assume the oldest inventory items are sold first, or weighted average cost. In your exotic wood example, with FIFO, if you still have that wood in inventory, you'd value it at your purchase price of $1200, not the current market value of $1600. The IRS wants you to value inventory at cost, not market value (with some exceptions). Once you pick a method, you need to use it consistently unless you get permission from the IRS to change.
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Paolo Rizzo
Has anyone used QuickBooks for tracking COGS? I'm wondering if it automatically generates the numbers for Form 1125-A or if I need to calculate separately?
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QuantumQuest
•I use QB for my pottery business. It can track COGS but you have to set it up correctly first! Make sure you classify your items properly as inventory items rather than non-inventory, and enable the inventory tracking feature. Then when you purchase materials, you'd post to inventory asset accounts, not expense accounts. When you sell, QB will automatically calculate COGS.
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Amina Sy
Just to add to what others have said - its important to understand that Form 1125-A should only include direct costs. Indirect costs like marketing, general shop utilities, office supplies etc usually go on Schedule C instead. The IRS looks closely at COGS so don't try to dump everything there!
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