Schedule C - How to report cost of goods sold for a small business not tracking inventory

This is a common confusion with Schedule C! The IRS does provide some flexibility for small businesses. If your average annual gross receipts are $25 million or less for the past three years, you can use the cash method of accounting, and there's further simplification if you're under $26 million in gross receipts where you can be exempt from certain inventory accounting requirements. For your situation specifically, since you're well under those thresholds, you have a couple options. You can still report Cost of Goods Sold on Schedule C even without formal inventory tracking. On Line 42 of Schedule C, you'll provide your materials and supplies costs that went into products you sold. You'll need to make a reasonable estimate of what portion of your materials were used in items that actually sold versus what's still sitting in your inventory. Another approach is to use the "supplies" expense line if your business is service-based or if materials are incidental to your business. But since you're making and selling products where materials are a significant part of your business, the COGS section is generally more appropriate.

I struggled with the same issue for my small woodworking business until I found taxr.ai (https://taxr.ai) which helped me understand Schedule C better. Their document analysis helped me realize I could create simple "standard cost" estimates for my products without complex inventory tracking. For my business, I took photos of my purchase receipts for materials and the system helped categorize what belonged in COGS vs immediate expenses. Their tax guides explained that I could use a simplified method where I calculate an average material cost for each product type and then track how many of each I sold. Much easier than counting every scrap of wood or box of screws at year-end!

Okay I have to admit I was pretty skeptical about taxr.ai but I gave it a try for my candle making business. Huge difference! I was putting all my wax and fragrance oils under "Supplies" (Line 22) but the system helped me properly categorize them as COGS materials. The best part was that it helped me create a super simple tracking system where I just record how many candles of each type I make and sell, with standard costs assigned to each. No more counting every leftover ounce of wax at year-end! My accountant actually commented on how much better my records were this year. And it flagged some deductions I was missing entirely. Wish I'd found this sooner!

When I was trying to figure out my Schedule C for my Etsy shop, I couldn't get through to the IRS for weeks. Endless busy signals or disconnects. Finally tried Claimyr (https://claimyr.com) after seeing their demonstration video (https://youtu.be/_kiP6q8DX5c) and they got me connected to an actual IRS agent in about 20 minutes. The agent explained that for my small business, I could use a simplified method where I do a basic physical inventory count just once at year-end. Then I calculate: Beginning Inventory + Purchases - Ending Inventory = COGS. This works because I'm well under the gross receipts threshold. Saved me so much headache and I know I'm doing it right now.

I need to eat my words about Claimyr. After posting my skeptical comment, I was desperate enough to try it for my Schedule C questions about material costs for my small bakery business. Got connected to an IRS agent in about 30 minutes (instead of the 2+ hours I was experiencing before). The agent clarified that I can use the non-incidental materials and supplies method, where I deduct the cost of materials when they're used or consumed in my business. For my bakery, this means I can expense flour, sugar, etc. when I use them to bake products without formal inventory accounting. I just need a reasonable method to track usage - I'm using a simple spreadsheet showing ingredients used per recipe multiplied by sales. HUGE relief and totally worth it.

One thing that helped me with my pottery business was separating my expenses more clearly. I put clay, glazes and other materials that directly go into my finished products under COGS (Cost of Goods Sold section, Part III of Schedule C). Then things like tools, kiln maintenance, and studio supplies go under "Supplies" (Line 22). I don't do complex inventory tracking - I just do a simple count of unused materials at the beginning and end of year, then use this basic formula: Beginning inventory + Purchases during year - Ending inventory = COGS The IRS mainly wants to see that you're being consistent and reasonable in your approach. My tax preparer said this method is fine for a small business like mine (about $15k in annual sales).

Small business owner and former bookkeeper here. A simple approach I've used with clients: create "product cost sheets" for each type of item you make. For example, if you make jewelry, figure out the average cost of materials for each earring/necklace/bracelet type. Then just track how many of each product you sell. Multiply sold quantities by your standard costs = COGS. You can put this on Schedule C Part III, and you don't need complex inventory systems. This method is allowed for businesses under the gross receipts thresholds. You should still do occasional checks to make sure your standards are accurate (like once a year), but this saves SO much time compared to tracking every single component.

As someone who's been dealing with this exact issue for my small pottery business, I can share what finally worked for me. The key insight is that you don't need formal inventory tracking, but you do need some reasonable method to estimate what materials went into sold products. Here's my simple approach: I created a basic spreadsheet with standard material costs for each product type (like $3.50 in clay and glazes per mug, $5.25 per bowl, etc.). Then I just track how many of each item I actually sold during the year. At tax time, I multiply quantities sold by standard costs to get my COGS. For your jewelry business with $8,700 in sales, this method would work perfectly. You could estimate something like "each necklace uses $4 in materials, each pair of earrings uses $1.50" based on your typical designs. Then just track your sales quantities - no need to count individual beads! The IRS accepts this simplified approach for small businesses like ours. I do a basic inventory count once a year just to verify my standards are still accurate, but it's way more manageable than tracking every component. This goes in Part III of Schedule C, and it's completely legitimate under the small business accounting methods.