TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Community

vivianvulpone

Solved

Are packaging costs considered part of Inventory Costs?

Forum|Forum|6 years ago
June 3, 2019
4 replies
0 views

No text available

TurboTax Business Windows

Best answer by IsabellaG

The IRS says "Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold.If they are not an integral part of the manufactured product, their costs are shipping or selling expenses."

So if you have a product that you are selling and the packaging for it is what would be included if you were displaying on a store shelf, then it's part of Inventory Costs. For example a pretty velvet box for jewelry is part of inventory costs.

But if you have packaging costs for shipping your merchandise, like shipping boxes and bubble wrap, tape,etc, that is part of shipping costs.

https://www.irs.gov/publications/p334/ch06.html

IsabellaGAnswer

Employee

But if you have packaging costs for shipping your merchandise, like shipping boxes and bubble wrap, tape,etc, that is part of shipping costs.

https://www.irs.gov/publications/p334/ch06.html

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

A_Granado

What if you own an online boutique and you have to ship out all your orders, is that considered COGS? Also, what if I pre-buy a bunch of boxes for future orders, is that considered inventory? If so how do I chart this and or categorize it in the inventory and or chart of accounts?

Critter

Employee

If you manufactured the items and boxed them individually for sale prior to whole selling them then that is added to the basis since it is the cost of manufacturing the product.

In your situation you are boxing them up for shipping ... the cost of shipping supplies are entered as either supplies or shipping costs and NOT in the COGS section.

Carl11_2

Employee

COGS (Cost of Goods Sold) section in the TurboTax programs asks for a number of things. Here's the breakdown.

Cost of Purchases - What *you* paid for the product you are selling. This includes all materials that become "a physical part of" the finished product.

Labor Costs - What you paid for someone to manufacture the product from start to finish. This person (or persons(s) *must* have physically touched the product you are claiming costs for in the "Cost of Purchases" box. If you have already reported your labor costs elsewhere, then you will *NOT* claim those labor costs here. For example, if what you paid a W-2 employee is already included in their W-2, or what you paid a 1099-MISC contractor is already reported and claimed elsewhere, you will *NOT* claim that labor cost here. To do so would be double-dipping.

Materials and Supplies - Items used in the manufacturing or sales prep that do not become a part of the finished product, but are not considered actual raw materials. For example, if you manufacture mirrors one of the last things you're going to do is clean that mirror before you package it. For that you will probably use Windex and paper towels. The Windex and towels do not become a part of the finished product. It is "consumed" during your manufacturing process. So this is a materials & supply expense. Other examples would include sand paper, abrasive rubbing compounds, etc.

Other Costs to Prepare for Sales - These are costs incurred that are not "a physical part of" the product being sold, yet are necessary in order to sell the product. This includes packaging materials, boxes, containers, displays, shipping costs, etc.

A_Granado

That's what I thought, but I am getting different information pertaining the "COGS". There is no physically store or shop to purchase our garments. Everything is ordered online and shipped. The boxes necessary to sell the product. We pre-purchase the boxes, inserts and tissue paper aka packaging to save money instead of buying individually. The only thing we charge for is the postage, the packing itself is a cost we acquire.

Critter

Employee

Ok ... you are NOT manufacturing the items ... you buy goods to resell and they come ready to sell.

What you do is package them for shipping AFTER you bought and sold the item ... it is a shipping expense and not part of the COGS. The shipping items are an expense to be deducted currently.

Rich Bake

No, it is definitely not

Critter-3

@Rich Bake

What does your post even mean ? You have posted to several threads on various matters so what is the purpose of this post ?

When calculating the cost of the product being manufactured the cost to package it for sale is part of the inventory costs and is used to determine total cost per unit so you know how much to price the item for sale.

Packaging for shipping is reported as part of the shipping costs and/or general supplies ... whichever works best with the bookkeeping system you use.

hunnybuns2009

I hate to resurrect such an old thread but here I am again. Almost 2 years later.

I need clarification on how I've got my finished products set up in Chart of Accounts.

I buy bottles, labels, and paint. All allocated to Expense Account: Packaging or to Supplies, (COG accounts) respectively.

I end up with a finished product which I have been allocating to Income Account: Merchandise Sales. This is an account set up years ago when I was working with a CPA. Is this correct?

I'm having some difficulty with COGS at year end for my TurboTax entries, and must be sure I'm doing it right.

PatriciaV

Employee

The finished product becomes merchandise. When that is sold, your profit is selling price less merchandise cost. I'm not sure why you would record the finished product in an income account.

Cost of Goods Sold, shown on Part III of Schedule C, is fairly easy to calculate.

Beginning Inventory (ending inventory on last year's return)
Plus: Purchases of direct materials (what goes into your finished product)
Plus: Labor you paid to others
Plus: Materials and supplies (included in your finished product)
Less: Ending Inventory (based on a physical count of finished product and unused materials/supplies)
= COGS

As long as your accounting entries are accurate and consistent, you should have the numbers to complete this equation.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

hunnybuns2009

Hi Patricia,

Thanks for your answer. I've read similar in other places, and that's why I'm questioning how my QB is set up now. Now, to be clear, I don't do any of those calculations - I rely on QB Retail Edition 2014 to do them for me.

What I really need is the Income Account that I should be using for my finished products...on a micro level if that makes sense 🙂 If I get it right at the product level, my yearly COGS on Balance Sheet should be right, right? Exactly what Income Account should my finished product properly be allocated to? Currently, and for 10 preceding years, it's been Merchandise Sales.

Again, if it helps: I buy bottles, caps, jars, (Packaging expense) fill them with paints (Supplies expense), label them (Packaging) , and sell them = Merchandise Sales. (maybe I'm overthinking this??)