You've made it to the best part of the Schedule C Form: Part III: Cost of Goods Sold! This is the part where most people really struggle, however if you have your inventory situation under control it should be a (relative) piece of cake.

For an overview of the Schedule C Form, please see our blog post Schedule C: An Instruction Guide.

To start with, you'll want to be sure you understand exactly what COGS actually is. We've written a handy blog post about it here: How do I calculate COGS (Cost of Goods Sold?)

33: Method used

This will usually be Cost. The cost method requires using either the FIFO, LIFO or Weighted Average method.

If you are using Craftybase to help complete your Schedule C, we use the Weighted Average method to determine your totals.

34: Was there any change in determining quantities, costs, or valuations between opening and closing inventory?

This is to see if you have changed the way you account for your inventory as this could have an impact on your opening and closing inventory tallies. If you haven't made any changes to the way you calculate your inventory, you'll be marking this as 'No'.

35: Inventory at beginning of year. If different from last year’s closing inventory, attach explanation.

If you have completed a Schedule C last year, take the number from Line 41 and enter it here. If this is your first Schedule C, this will be zero.

36: Purchases less cost of items withdrawn for personal use

This is the total of all purchases you made during the year. Ensure you remove any purchases made then removed from your inventory for personal use.

37: Cost of labor. Do not include any amounts paid to yourself

If you have employed anyone to assist you with your craft business during the year then you would account for this cost here. Keep in mind that this cost is mainly for official employees (that will have a W2). Contracted and casual workers should be instead factored in at Part II, Line 11.

38: Materials and Supplies

This section is reserved for any materials and supplies not already included in your inventory totals above that are also not being claimed as supplies in Part II. Common usage of this section is for consumable hardware or chemicals used in the production of your finished goods for sale.

39: Other Costs

This section is to provide a way of accounting for any other costs directly related to your products that don't fit into the available categories above.

40: Add Line 35 through Line 39.

This a work in progress step, so you'll want to add together what you've entered in Line 35 and Line 39 and write the total here.

41: Inventory at end of year.

This is the total amount of materials you have on hand at the end of the year, including materials that are already manufactured into finished products that have not been sold yet.

42: COGS

Another working step, take the total you have for 41 and subtract it from 40 to get your final Cost of Goods Sold figure. Yay!

Also don't forget to enter this amount in Part I, Line 4.


For a line-by-line walkthrough of Schedule C Part I, please see our blog post here: Schedule C Guide: Part I - Income »

For a line-by-line walkthrough of Schedule C Part II, please see our blog post here: Schedule C Guide - Part II: Expenses »

FREE Schedule C Guide for Handmade Sellers eBook

The Schedule C form can be pretty intimidating to handmade sellers as it comes with some pretty heavy tax jargon to wade through. Our FREE eBook covers each section, line by line so you can complete this filing with ease.

Topics covered include:

  • Do I have to file if I’m just a hobby business?
  • Common business structures
  • Business Details
  • Part I Income
  • Part II Expenses
  • Part III Cost of Goods Sold
  • Part IV Vehicle Expenses
  • Bookkeeping Software Recommendations

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