Shipping and Freight Costs as Expense or COGS?

Thank you so much for this reply. It was incredibly helpful!

I have somewhat of the same issue.  I buy floor heat cable and thermostats from a tile store in my installation business.  Occasionally they will charge me freigth on a product which I pickup at their store.  I then charge the freight to my customer.  When I do a project P&L it shows up as income: why.  I paid the freight to the company how do I expense it.  It is a small amount (less that $300 per year).  I don't really care to track it but I do want to account for it.  Please give me you best advice.  Also I am considering adding a one-time trip charge to my estimates to cover cost to pick up materials as my supplier is more than a hundred miles from me and most of my jobs.  How to I add it and under what account(s) do I put it?

Thanks you

Hi there, Jonny. Allow me to share some steps to ensure accurate transaction records in QuickBooks Online (QBO).

You've possibly selected an income account when you created the Products & Services (Freight) item that's why it shows as an income when you do a project P&L. Therefore, you'll need to review the account used for that item (Freight) and change it to an expense account if it's income. You can follow the steps below:

1. Go to the Gear icon and select Products and services.
2. Locate the item and click Edit.
3. From the Income account ▼ dropdown, select the expense account to use.
4. Click Save and close.

Additionally, you can refer to this article for complete guidance: Change the account for a product or service item in QuickBooks Online.

Moreover, you can create a trip service item and choose the appropriate account to reflect it as an expense or income. If you want to show it as an expense, you can select an expense account, and if you want to show it as income, you can select an income account. 

However, if you're unsure about which account to use, it's best to consult your accountant for guidance. If you don't have one, you can refer to these articles: 

• Learn about ProAdvisor profile and Find-a-ProAdvisor guidelines
• Add accountant users in QuickBooks Online

Furthermore, you can check out this article to learn how to organize your products and services in QBO: Group products and services into different categories in QuickBooks Online.

Feel free to reach out again in the Community if you have any further concerns. We're here to lend a hand. Keep safe.

@Jonnybegood 

"I then charge the freight to my customer. When I do a project P&L it shows up as income: why. I paid the freight to the company how do I expense it. It is a small amount (less that $300 per year). I don't really care to track it but I do want to account for it."

It's revenue (gross income) because you charged your customer for it - no different than any other type of revenue.  The freight charge from the tile store is a materials expense just like the floor heat cable and t-stats.  If you pass through the freight expense to your customer (no markup), then the materials expense offsets the revenue and you have no net (taxable) income.    

"Also I am considering adding a one-time trip charge to my estimates to cover cost to pick up materials as my supplier is more than a hundred miles from me and most of my jobs. How to I add it and under what account(s) do I put it?"

That's up to you.  It's revenue to you so set up a 'Trip Charge' item or add it to your total job cost.  Either way works as long as you assign the charge to an income account in QB.

On my P&L there are category called "Other Income and Other Expenses."  Would it be advisable to set up the Trip charge and Freight as other income and the freight charged by my supplier as "other Expenses.?"  That way it is accounted for and kept separate from the revenue of my regular business activities?

Hi Rainflurry,

I was hoping that your comment re: freight charges is applicable to my situation (manufacturing - we are a beverage company).

“From a tax perspective. shipping charges from a vendor for inventory do not need to be capitalized if you're considered a small business taxpayer (less than $25M in annual revenue).  Therefore, they can be expensed to COGS immediately.  Freight charges for equipment that the business uses should be capitalized into the cost of the asset“.

As shipping/freight from our ingredient vendors to our co-packer is a direct cost of inventory, wouldn’t those costs still have to be capitalized under GAAP?  I know there were changes under the TCJA in terms of indirect costs not needing to be capitalized for small businesses, but to the best of my understanding, freight on materials from vendors (i.e. freight-in) is still a direct cost.  Are you by chance able to point me to somewhere in the tax code that states otherwise?

Really appreciate any further info you can offer.  

Thanks! 

Sorry, meant to put @Rainflurry on my post above 

@justin55 

"As shipping/freight from our ingredient vendors to our co-packer is a direct cost of inventory, wouldn’t those costs still have to be capitalized under GAAP?"  Yes, under GAAP those costs are capitalized.

The IRC provides an exemption to UNICAP rules (IRC Section 263A) for small business taxpayers that meet the gross receipts test as defined in section 448(c).  §1.263A-1(j) is the exemption for small business taxpayers and contains references to section 448(c) and links to §1.448-2(c) that define what the gross receipts test is.  Here is a link to the Regs. Sec.:§1.263A-1 

@justin55 

You can also find it in IRS Publication 538, page 17.  It's the first item under Exceptions.

Thanks!

@Rainflurry Great, thank you so much again!

Hey, I have a question too related to this same scenario.
If freight charges are included in COGs, wouldn't it distort the GP margin?

@Harshm135 

Freight charges should be part of COGS regardless if they are expensed immediately or capitalized into inventory and expensed to COGS when sold.  The only significant difference would be if your inventory increased or decreased significantly in a fiscal year.  If your inventory increased (and presumably your freight costs) and you expensed freight to COGS immediately, COGS would be higher and GM lower compared to capitalizing freight costs.  If your inventory decreased and you expensed freight to COGS immediately, COGS would be lower and GM higher compared to capitalizing freight costs.  If you're preparing your financial statements in accordance with GAAP, then you should capitalize freight costs. If you're preparing your financial statements on tax basis then you have the choice to capitalize freight costs or expense to COGS immediately.