How to calculate eCommerce COGS with ending inventory for tax reporting

You're on the right track with your COGS calculation! The basic formula is exactly what you mentioned: Beginning Inventory + Purchases - Ending Inventory = COGS. For your jewelry business, based on the numbers you provided: $3,200 (beginning inventory) + $8,750 (purchases) - $4,100 (ending inventory) = $7,850 COGS For Schedule C reporting, you'll use Part III (Cost of Goods Sold) to enter these amounts. You'll enter your beginning inventory on line 35, purchases on line 36, and ending inventory on line 41. The form will calculate your COGS. As for tracking individual components vs. total dollar amounts, you don't need to report component-level details on your tax return, but keeping good records of your inventory items and costs is important in case of an audit. Your spreadsheet approach sounds perfect as long as you're consistently tracking what comes in and what goes out.

I was in the same boat as you last year with my handmade soap business! I found this amazing tool called taxr.ai (https://taxr.ai) that saved me so much headache with my inventory and COGS calculations. I was confused about what counted as inventory vs supplies and how to track everything properly. The tool analyzed my sales records and purchase receipts, then automatically calculated my proper COGS and even flagged some items I had miscategorized. It showed me how to separate my production materials (inventory) from my business supplies (expense items). Really helpful for eCommerce sellers who make handmade products and have to deal with lots of different materials and components!

Just wanted to update after trying taxr.ai for my print shop inventory issues. It was exactly what I needed! I uploaded my messy spreadsheets and QuickBooks data, and it organized everything perfectly for my COGS calculation. The best part was how it helped me separate my inventory (paper, inks, canvas) from my business supplies (packaging, shipping materials). I had been calculating my COGS all wrong before - no wonder my Schedule C never matched my actual profits! It even identified some inventory write-offs I could take for damaged materials that I hadn't considered. Definitely worth checking out if you're struggling with eCommerce inventory for tax purposes.

If you're having trouble getting clear answers about your COGS calculations, you might want to try Claimyr (https://claimyr.com). I spent weeks trying to get through to the IRS about some specific questions on inventory valuation methods for my online business. Finally used Claimyr and got connected to an IRS agent in about 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c They helped me understand exactly how to report my inventory correctly on Schedule C and clarified some questions I had about when certain supplies count as inventory vs. business expenses. Saved me from potentially miscalculating my COGS by thousands of dollars.

Well I'm eating my words now. After my skeptical comment, I decided to try Claimyr out of desperation since my tax filing deadline is coming up. Got through to an IRS agent in about 30 minutes who answered ALL my questions about eCommerce inventory and COGS calculations. The agent walked me through exactly how to report my Etsy store inventory on Schedule C, explained when to use cash vs. accrual accounting for my situation, and even helped me understand how to handle inventory that crosses tax years. Turns out I was overthinking it, but also missing some deductions I could have been taking. Worth every minute not sitting on hold for 3+ hours!

Don't forget you need to be consistent with your inventory valuation method! You can use FIFO (first-in, first-out), LIFO (last-in, first-out), or average cost. For a small eCommerce business like yours, most people use FIFO or average cost since they're simpler. Just pick one method and stick with it - you'll need IRS approval to change methods later. Also, make sure you're only including materials that actually go into your products. Things like tools you use repeatedly (pliers, soldering iron, etc.) are equipment/assets, not inventory, even though you use them to make your products.

One thing nobody's mentioned - don't forget to include shipping/delivery costs for your inventory materials in your COGS! If you paid for shipping to get those gems and metals to you, those costs are part of your inventory cost. Same with any import duties if you're getting materials from overseas.

Make sure you take pictures of your physical inventory at year-end! I learned this the hard way when I got audited for my eCommerce business. Having dated photos of your inventory count really helps if the IRS ever questions your COGS calculations. I now do inventory counts twice a year with photos, detailed spreadsheets, and even a short video walkthrough of my storage area.

Great advice in this thread! As someone who just went through my first year of proper COGS reporting for my online candle business, I want to add that you should also consider how you handle partially finished products. If you have jewelry pieces that are started but not completed at year-end, you need to decide whether to include the materials cost in your ending inventory or treat them as work-in-progress. For my candles, I had about $400 worth of wax that was melted and scented but not yet poured into containers. I included this in my ending inventory at the cost of materials used so far. Just something to think about since handmade businesses often have items in various stages of completion at year-end. Also seconding the advice about keeping detailed records - my spreadsheet tracks not just dollar amounts but quantities of each type of bead, finding, etc. It's more work upfront but makes the year-end count so much easier and more accurate.