How do you find cost of goods for tax purposes

Let me share some information on how QuickBooks Desktop handles the cost of goods sold, jrfarrow.

When you set up your first inventory item in your Inventory List, QuickBooks automatically adds two accounts to your company file's Chart of Accounts. These are the following:

• 12100 - Inventory Asset - Other Current Asset
• 50000 - Cost of Goods Sold (COGS) - Cost of Goods Sold

Each inventory item requires an income account and you can set up your accounts or subaccounts. The inventory COGS is only affected when you sell inventory items on invoices or sales receipts. When you sell an inventory item, we'll need to run the Transaction Journal Report for the invoice/sales receipt and you see the Sales/Accounts Receivable transaction. Then, you'll see the Inventory/COGS transactions which credit the Inventory Asset account and debits the COGS accounts.

Also, the Cost of Good Sold (COGS) will only be realized when the item is being sold out. This account isn’t meant for the items you use to create your products, such as raw materials. To know if the number is the same as the cost of goods sold in the report or if is this the number your looking for, we'll need to run the Profit and Loss report to show the COGS. From there, double-click the amount to see the transactions. Here's how:

1. On the Profit and Loss report, click the amount next to the Cost of Goods Sold account.
2. Click the entry to open it.
3. Go to the Reports tab, then click Transaction Journal.

I've added the Customize company and financial reports link to help you easily get a view of how well your business is doing. I'm also adding this article for your reference: Understand inventory assets and cost of goods sold track.

Let me know in the comment section below if you have any other questions. I'll be always around ready to help. Have a great day ahead. 

@jrfarrow 

COGS is the cost of items sold during a given year regardless of when they were purchased.  For example, say you bought a $100 (cost) item in 2019 but didn't sell it until 2022.  When you purchased it in 2019, it should have been booked to inventory (an asset account on your balance sheet) where it sat until it was sold in 2022, at which point, inventory would be reduced by $100 and COGS would be increased by $100.

If your CPA is telling you that COGS = Beginning inventory - ending inventory + COGS from P&L, that's a problem.  COGS = beginning inventory + purchases made during the tax year - ending inventory.  Or, your CPA can back into purchases from knowing the beginning inventory, ending inventory from your balance sheets and COGS from your P&L.

If you want a good understanding of how to calculate COGS for tax purposes, look up IRS Form 1125-A. 

Thanks for the reply Rainflurry, If I could examine your statement:

"If your CPA is telling you that COGS = Beginning inventory - ending inventory + COGS from P&L, that's a problem. COGS = beginning inventory + purchases made during the tax year - ending inventory. Or, your CPA can back into purchases from knowing the beginning inventory, ending inventory from your balance sheets and COGS from your P&L."

Specifically, that last sentence, my first thought is you mixing the notion of COGS as defined by the tax man and COGS as calculated by QB shown on the P&L statement. Am I right? I don't think the COGS as presented in the P&L will help you calculate COGS for tax purposes.

Using your example, if that was the only item you had in inventory and you didn't make any other purchases in 2022, then:

beginning inventory: $100

Ending inventory $0

COG from P&L report $100

We know the correct number for Cost of Goods for tax purposes is $100. You can see that if you try to use the COG from the P&L to calculate this number then you will be counting the cost of the item you sold twice.

Where is the report that shows the cost of inventory items purchased during a tax year?

Am I missing something? Doesn't everyone have this issue?

Thanks for the reply Rainflurry, If I could examine your statement:

"If your CPA is telling you that COGS = Beginning inventory - ending inventory + COGS from P&L, that's a problem. COGS = beginning inventory + purchases made during the tax year - ending inventory. Or, your CPA can back into purchases from knowing the beginning inventory, ending inventory from your balance sheets and COGS from your P&L."

Specifically, that last sentence, my first thought is you mixing the notion of COGS as defined by the tax man and COGS as calculated by QB shown on the P&L statement. Am I right? I don't think the COGS as presented in the P&L will help you calculate COGS for tax purposes.

Using your example, if that was the only item you had in inventory and you didn't make any other purchases in 2022, then:

beginning inventory: $100

Ending inventory $0

COG from P&L report $100

We know the correct number for Cost of Goods for tax purposes is $100. You can see that if you try to use the COG from the P&L to calculate this number then you will be counting the cost of the item you sold twice.

Where is the report that shows the cost of inventory items purchased during a tax year?

Am I missing something? Doesn't everyone have this issue?

I've got the report you need that shows the cost of inventory purchased items, jrfarrow.

You can pull up the Purchases by Item Detail report. The report shows individual purchase transactions categorized by item for the specific period with the cost price.

Let me guide you on how to do it:

1. Go to Reports and select Purchases > Purchases by Item Detail.
2. Select the Date you want to see on the report.
3. Click on Customize Report and Filter it to the data needed.
4. Select OK.

Check our customize reports to learn more about customizing them to the information needed.

I'm also adding this article that provides information about different reports that cater to your business needs:

Understand reports in QuickBooks Desktop.

You can always get back to this thread if you have follow-up questions with running reports or other related concerns. I'll be sure to get back to you as soon as I can.

Hi GlinetteC, I think you posted a reply to my thread in error.

Yes, jrfarrow. 

I've already updated my answer on another thread. You can check out this link: https://quickbooks.intuit.com/learn-support/en-us/taxes/re-how-do-you-find-cost-of-goods-for-tax-pur....

If you have any additional questions related to COGS or any other questions. You can always post them anytime here. The Community is ready to help.

Yes, your statement is correct:

the COGS on your P&L is the same as your COGS for tax purposes

My CPA is wrong and I think his calculation sent me down a rabbit hole but I see the light now!

Thanks,

Hi again, Rainflurry.

I appreciate you for always sharing your knowledge about QuickBooks. This will definitely help other users as well in the future. Please keep on posting here in the Community.

Keep safe and have a great rest of the day.