Line 4 - Cost of Goods Sold

In order to complete this line you must turn Schedule C over and complete lines 33 through 42 of Part III. How you complete those lines depend upon whether you are using inventories or not, and whether the Uniform Capitalization Rules apply to your business.

Inventories: Normally, a company which produces or sells products is required to keep beginning and end of the year inventories in order to calculate the cost of goods sold. The beginning inventory (line 35) is the value of finished products, partial products and materials necessary to make products which you have on hand at the beginning of the year. Line 36 is for all purchases of products for resale (minus those you kept for your own use) and lines 37, 38, and 39 are for the materials, labor and other costs necessary to make new products. You add these to the starting inventory and the amount on line 40 should be the total value of the products that you had available for sale during the tax year. The ending inventory (line 41) is how much you had left over at the end of the year. When you subtract the ending inventory from line 40, the result (line 42) should be the total value of the products that you sold during the year.

However, under the "small taxpayer exception" of Revenue Procedure 2001-10, if the average annual gross income of your business over the last three years is less than one million dollars, then you are not required to use inventories. If you choose not to use inventories, then you account for the costs associated with creating your publications as "materials and supplies that are not incidental." "Materials and supplies that are not incidental" can only be deducted in the year they are used up or sold. Therefore, you must use some reasonable means for determining how much of the materials and supplies, as well as publications purchased for resale that you used in the tax year. The total costs of such "materials and supplies" should be entered on line 36 (according to the instructions for Schedule C, though line 38 would seem to make more sense.). If you are using this method, leave lines 35 and 41 blank. On line 40 add up any entries in lines 36, 37 and 38 and repeat the amount on line 40 on line 42 and copy that to line 4 on the front of Schedule C.

For more buy the Publisher's Pocket Tax Guide....