TurboTax is a very popular tax preparation software designed to make filing taxes easier. One crucial aspect for businesses and self-employed individuals is accurately reporting their Cost of Goods Sold (COGS). This figure directly impacts your gross profit and, consequently, your taxable income.
This comprehensive guide will walk you through, step-by-step, how to properly enter your Cost of Goods Sold into TurboTax. We'll cover everything from understanding what COGS is to navigating the specific sections within the software.
Ready to Master Your COGS in TurboTax? Let's Dive In!
Before we even open TurboTax, let's make sure you have all your ducks in a row. Are you feeling a bit overwhelmed by numbers and receipts? Don't worry, you're not alone! Many business owners find the COGS calculation a bit tricky. But by the end of this guide, you'll be a pro. So, grab a cup of coffee (or tea!), gather your financial records, and let's get started on simplifying your tax journey.
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| How To Enter Cost Of Goods Sold In Turbotax |
Step 1: Understand What Cost of Goods Sold (COGS) Is (And What It Isn't!)
This is perhaps the most critical foundational step. Without a clear understanding of COGS, you risk misreporting your income, which can lead to headaches down the line.
1.1 Defining Cost of Goods Sold
Simply put, Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company during a specific period. Think of it as the direct expenses directly tied to bringing your product or service to market.
For a retail business: This would include the price you paid for the inventory you sold, plus any direct costs to get it ready for sale (e.g., shipping costs from your supplier).
For a manufacturing business: This would include the cost of raw materials, direct labor involved in production, and manufacturing overhead (like utilities for the factory).
For a service business (less common, but applicable): If your service involves tangible goods (e.g., a plumber installing a new water heater), the cost of that water heater would be part of your COGS.
1.2 What COGS Doesn't Include
It's equally important to understand what isn't included in COGS. These are generally considered operating expenses and are deducted elsewhere.
Indirect expenses like marketing and advertising.
Administrative costs such as office rent, salaries of administrative staff, or general office supplies.
Shipping costs to customers (these are typically selling expenses).
Depreciation of office equipment.
1.3 Why COGS Matters for Your Taxes
COGS is a crucial component of calculating your gross profit.
Revenue - Cost of Goods Sold = Gross Profit
A higher COGS means a lower gross profit, which in turn means a lower taxable income. Accurately calculating your COGS is essential for minimizing your tax liability legally.
Step 2: Gather Your Essential Documentation
Before you even log into TurboTax, you need to have all your financial ducks in a row. This will make the entire process smoother and prevent frustration.
2.1 Key Documents You'll Need
Inventory Records: Detailed records of your beginning inventory, purchases throughout the year, and ending inventory. This might be from an inventory management system, spreadsheets, or even physical counts.
Purchase Invoices: Invoices from your suppliers for all the goods or raw materials you purchased.
Shipping/Freight Bills In: Any costs you incurred to get your inventory to your place of business.
Labor Costs (for manufacturers): Records of wages paid to direct labor involved in production.
Manufacturing Overhead Records (for manufacturers): Utility bills for your factory, depreciation on production equipment, etc.
Prior Year's Tax Return: This is helpful for verifying your beginning inventory if you had inventory last year.
QuickTip: Don’t just consume — reflect.
2.2 Organize Your Information
Consider creating a summary sheet or a dedicated spreadsheet that breaks down your COGS components. This will be invaluable when you start entering numbers into TurboTax.
Step 3: Log In and Navigate to the Business Income Section
Now that you're armed with knowledge and documents, it's time to open TurboTax!
3.1 Accessing Your Return
Open TurboTax: Launch the software or go to the TurboTax website and log into your account.
Select Your Return: Choose the tax year you're working on.
Go to the "Income & Expenses" Section: This is usually a prominent tab or section on the main dashboard.
3.2 Finding Your Business
If you've previously entered business income, you'll likely see your existing business listed. Click to continue working on it.
If this is your first time entering business income, you'll need to select "Start a New Business" or a similar option.
3.3 Identify Your Business Type
TurboTax will typically ask you to confirm your business type (e.g., Sole Proprietorship, LLC, Partnership). The COGS entry process is generally similar for most small business structures reporting on Schedule C (Form 1040).
Step 4: Locate the Cost of Goods Sold Section
Once you're in your business's income and expenses section, TurboTax will guide you through various categories.
4.1 Navigating Business Expenses
You'll typically see a list of common business expense categories. Look for something that says "Cost of Goods Sold," "Business Expenses (Deductible)," or similar.
TurboTax is designed to be user-friendly, so it will often prompt you with questions that lead you to the correct section.
4.2 Clicking on "Cost of Goods Sold"
Click on the "Cost of Goods Sold" link or button. This will open a dedicated section where you can input the relevant figures.
Step 5: Enter Your COGS Information Step-by-Step
This is where your organized documentation from Step 2 comes into play. TurboTax will walk you through a series of questions to calculate your COGS.
QuickTip: Stop to think as you go.
5.1 Beginning Inventory
"Did you have inventory at the beginning of the year?"
If yes, enter the value of your inventory as of January 1st of the tax year. This figure should match your ending inventory from the previous year's tax return.
If no, enter zero.
5.2 Purchases
"Enter the cost of goods you purchased for sale during the year."
This includes the cost of all raw materials or finished goods you bought directly from suppliers. Don't forget to include freight-in costs (the cost of shipping goods to your business).
5.3 Labor Costs (for Manufacturers)
"Did you pay anyone to directly produce the goods you sold?"
If yes, enter the wages paid to employees directly involved in manufacturing or production. Do not include administrative or sales salaries here.
5.4 Materials and Supplies
"Enter the cost of materials and supplies used in making your products."
This is for items that become part of the finished product but might not be categorized as "purchases" (e.g., small components, packaging materials directly integrated with the product).
5.5 Other Costs
"Do you have any other costs related to producing your goods?"
This can include a variety of direct costs, such as:
Utilities for the manufacturing plant
Rent for the manufacturing facility
Repairs and maintenance on production equipment
Depreciation on production machinery
Be careful here! Only include costs directly related to the production of goods. When in doubt, consult a tax professional.
5.6 Ending Inventory
"Enter the value of your inventory at the end of the year."
This is the value of unsold inventory as of December 31st of the tax year. A physical count or an accurate inventory management system is crucial for this figure.
5.7 TurboTax Calculation
Once you've entered all the components, TurboTax will automatically calculate your total Cost of Goods Sold using the following formula:
Beginning Inventory + Purchases + Labor + Materials & Supplies + Other Costs - Ending Inventory = Cost of Goods Sold
Step 6: Review and Double-Check Your Entries
This step is non-negotiable! Mistakes in COGS can significantly impact your tax liability.
6.1 Verify Against Your Records
Go back to your organized documentation from Step 2.
Compare each figure you entered in TurboTax against your source documents.
Look for any typos or transposed numbers.
6.2 Review the Summary
Tip: Slow down when you hit important details.
TurboTax will usually provide a summary of your COGS calculation. Take a moment to review it and ensure it makes sense.
6.3 Consider the Impact
Does the calculated COGS seem reasonable given your business activity for the year? If it looks unusually high or low, it's a red flag that something might be off.
Step 7: Continue with Other Business Expenses and Finalize Your Return
Once you've confidently entered your COGS, you'll continue with the rest of your business expenses and then proceed to finalize your tax return.
7.1 Other Business Deductions
TurboTax will guide you through other common business expenses like:
Advertising and marketing
Office expenses
Rent
Utilities (for office, not manufacturing)
Professional fees
Travel and entertainment
Vehicle expenses
7.2 Final Review
Before filing, TurboTax offers a comprehensive review process. Pay close attention to any warnings or suggestions it provides.
7.3 File Your Return
Once everything is accurate and you're satisfied, you can electronically file your return through TurboTax or print it out to mail.
10 Related FAQ Questions
How to Calculate Beginning Inventory for COGS?
Your beginning inventory for the current tax year is simply your ending inventory from the previous tax year. If it's your first year in business, your beginning inventory is zero.
How to Include Shipping Costs in COGS?
Shipping costs incurred to bring inventory to your place of business (freight-in) should be included in your "Purchases" or "Other Costs" section within COGS. Shipping costs to customers are generally selling expenses.
QuickTip: Check if a section answers your question.
How to Account for Returns and Allowances in COGS?
Returns to suppliers reduce your "Purchases" for COGS. If customers return goods to you, those goods become part of your ending inventory, thus increasing it and reducing your COGS for the period.
How to Handle Inventory Shrinkage (Theft, Damage) in COGS?
Inventory shrinkage (due to theft, damage, or obsolescence) typically increases your COGS. The lost inventory is no longer part of your ending inventory, which will result in a higher COGS figure when calculated.
How to Determine Ending Inventory Value?
Ending inventory is valued by conducting a physical count of all unsold goods at the end of your tax year (December 31st for most). This count is then multiplied by the cost you paid for those specific items, using an accepted inventory costing method (e.g., FIFO, LIFO, Weighted-Average).
How to Choose an Inventory Costing Method (FIFO, LIFO, Weighted-Average)?
TurboTax doesn't typically ask you to select a specific costing method within the COGS section, but it's crucial for your underlying records. FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted-Average are common methods. Your choice can impact your COGS and, therefore, your taxable income, so it's best to be consistent and consult with an accountant if unsure.
How to Enter COGS for a Service Business without Physical Goods?
For a pure service business that doesn't sell physical goods, you generally will not have Cost of Goods Sold. Your primary expenses will be operating expenses like labor, rent, marketing, etc., which are entered in other expense categories.
How to Correct a Mistake in COGS After Filing?
If you realize you made a mistake in your COGS after filing your tax return, you'll need to file an amended tax return (Form 1040-X). TurboTax can typically help you prepare an amended return.
How to Reconcile COGS with Your Financial Statements?
Your COGS figure entered into TurboTax should ideally match the Cost of Goods Sold reported on your internal profit and loss (P&L) statement for the same tax year. Discrepancies warrant investigation.
How to Get Help from TurboTax Support for COGS Questions?
TurboTax offers various support options, including online help articles, community forums, and direct access to tax experts (which may require an additional fee depending on your TurboTax version). Look for the "Help" or "Support" section within the software or on their website.
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