COGS on Schedule C — What Handmade Sellers Need to Fill Out Part III
Schedule C Part III is the section that trips up most handmade sellers at tax time. Here's what COGS actually means for makers, what to include, and how to fill it out correctly.
It’s tax season, and you’re staring at Schedule C. You’ve filled in your income. You’ve listed your expenses. Then you hit Part III — “Cost of Goods Sold” — and your stomach drops a little.
What counts as inventory for a handmade seller? Do you include materials you haven’t used yet? What about half-finished products? And what does the IRS actually want to see?
This is the section that trips up more makers than any other. Let’s work through it properly.
What Is Schedule C Part III?
Schedule C is the tax form sole proprietors use to report business income and expenses. Part III — “Cost of Goods Sold” — is a separate calculation that feeds into your total profit. The IRS uses it to understand how much it actually cost you to produce the goods you sold.
For handmade sellers, this section matters more than it does for a service business or a reseller. You’re a manufacturer. You buy raw materials, transform them into products, and sell those products. That manufacturing process creates a special kind of expense — COGS — that the IRS treats differently from regular business expenses like software subscriptions or marketing.
The number you calculate in Part III flows to Line 4 on Schedule C and reduces your taxable profit directly. Get it wrong, and you either overpay or underpay your taxes.
The COGS Formula for Handmade Sellers
Part III walks you through this calculation line by line:
Beginning Inventory + Purchases − Ending Inventory = Cost of Goods Sold
Here’s what each piece means for a maker:
- Beginning Inventory — the value of all your inventory (materials, work-in-progress, finished goods) at the start of the tax year (January 1)
- Purchases — materials you bought during the year specifically for resale or manufacturing
- Ending Inventory — the value of all remaining inventory at year-end (December 31)
- COGS — what you actually consumed to produce the goods you sold
Let’s say you make handmade candles. On January 1 you had $800 in inventory (wax, wicks, fragrance oils, containers, and finished candles). Through the year you purchased another $4,200 in materials. On December 31, you counted everything and it came to $1,000. Your COGS would be $800 + $4,200 − $1,000 = $4,000.
That $4,000 reduces your taxable income, not just your gross revenue. It’s the cost of goods you actually sold, not everything you bought.
What Counts as Inventory for Handmade Sellers?
This is where makers often get confused. For the IRS, “inventory” has a specific meaning — and it’s broader than most people expect.
Raw materials
Everything you buy to make your products. For a soap maker, that’s oils, lye, fragrance, colourants, and packaging. For a jeweller, that’s wire, beads, findings, and clasps. For a candle maker, it’s wax, wicks, fragrance oils, and containers.
Include only materials intended for resale (products you make and sell). Materials used for office purposes — like tape for shipping — belong in your regular expenses, not here.
Work-in-progress (WIP)
Partially finished goods count as inventory. That batch of soap that’s curing. The jewellery blanks you’ve stamped but haven’t finished. The candles poured but not labelled.
Most makers skip WIP entirely. That’s a mistake. It may be a small number, but it’s the honest picture of your inventory at a point in time — and the IRS asks for it.
Finished goods
Products you’ve made and are ready to sell but haven’t sold yet. Anything sitting in your stock room, craft fair bins, or display shelves at year-end belongs here.
What does NOT count
- Materials you used for personal use (not for your business)
- Tools and equipment (these go in your regular business expenses or are depreciated)
- Packaging that’s part of the product cost is included; shipping materials for fulfilled orders generally go in expenses
Line-by-Line Walkthrough of Part III
Schedule C Part III has six lines. Here’s what each one asks for:
Line 33 — Method used to value closing inventory
You’ll check one of three boxes: Cost, Lower of Cost or Market, or Other. Most handmade sellers use Cost — you value inventory at what you paid for it. This is the simplest and most common method, and it’s perfectly acceptable for small businesses.
Line 34 — Inventory change
Check yes or no. Did your inventory valuation method change from last year? If this is your first year, check no.
Line 35 — Inventory at beginning of year
This should equal your ending inventory from last year’s return. If last year was your first year filing, your beginning inventory might be zero — or it’s whatever you had on hand when you started the business.
Line 36 — Purchases
Total materials purchased during the year for your products. This is your raw ingredient spend, not everything you bought. Office supplies, tools, and packaging for shipping go elsewhere.
Line 37 — Cost of labour
If you paid anyone else to help make your products, this is where it goes. For most solo makers, this line is zero. Your own labour does not go here — you don’t pay yourself a wage as a sole proprietor.
Line 38 — Materials and supplies
Small materials and supplies used in manufacturing that don’t fit neatly into “purchases.” This line can overlap with Line 36 depending on how you categorise things — just avoid double-counting.
Line 39 — Other costs
Overhead costs directly tied to manufacturing. Things like manufacturing equipment repairs, rent on workspace used for production (if not already deducted on Line 30b), or utilities for your workspace. Overhead is commonly missed by makers calculating COGS — don’t skip it.
Line 40 — Total
Add Lines 35 through 39.
Line 41 — Inventory at end of year
Your closing inventory count, valued at cost. This requires a physical count (or a tracked inventory system) at December 31.
Line 42 — Cost of goods sold
Line 40 minus Line 41. This flows to Line 4 on the front of Schedule C.
Common Mistakes Handmade Sellers Make
Forgetting to count inventory at year-end
The most common mistake, by far. If you don’t do a year-end inventory count, you can’t accurately calculate your closing inventory — and without that number, your COGS will be wrong. Many makers use an approximate figure or simply enter zero, which overstates their costs and understates taxable income.
Do a physical count in late December. It doesn’t have to be perfect, but it needs to be real.
Leaving out work-in-progress
WIP is inventory. If you have soap curing, resin setting, or leather being prepped, that’s a real value sitting in your business. Ignoring it distorts your ending inventory figure.
Missing overhead costs
Direct materials are obvious. But the electricity running your work lights, the rent on the studio where you pour your candles, the cost of supplies used in the manufacturing process — these belong in COGS too, not just in your general expenses. Many makers understate COGS by treating everything as a simple expense rather than properly attributing overhead to production costs.
Mixing personal and business materials
If you buy fragrance oil for both personal use and your candle business, only the portion used in the business belongs in your COGS. Splitting mixed-use purchases is your responsibility — the IRS expects you to make this distinction.
Using the wrong beginning inventory figure
Your beginning inventory for the current year must match your ending inventory from the prior year. If they don’t match, it’s a red flag. If this is your first year, go back and establish what you actually had on January 1.
Counting everything you bought, not what you sold
COGS represents the cost of goods sold, not everything you purchased. That’s what the beginning/ending inventory calculation is for — it adjusts for the materials you still have on hand. Don’t just plug in your total purchases for the year.
How Craftybase Makes This Easier
Doing this calculation manually at tax time means tracking every material purchase, counting physical inventory twice (beginning and end of year), allocating overhead, and accounting for WIP — all from memory or scattered receipts.
Craftybase tracks all of this throughout the year. Every time you manufacture a batch of products, the software deducts materials from inventory automatically. Every purchase updates your material cost in real time. At year-end, your current inventory value is already calculated — no physical count scramble required.
The COGS report in Craftybase generates the figures you need for Schedule C Part III directly: beginning inventory, purchases, ending inventory, and total COGS. You can run it for any date range, filtered to your tax year.
For a walkthrough of the full Schedule C filing process as a maker, the Schedule C guide for handmade sellers covers every section from income to deductions.
Frequently Asked Questions
Do I need to complete Schedule C Part III if I sell handmade products?
Yes. If you manufacture products from raw materials and sell them — which describes every handmade seller — you have inventory, and Part III applies to you. The IRS requires you to account for the cost of producing the goods you sold, not just the materials you purchased. Skipping Part III or leaving it blank will produce an inaccurate profit figure on your return.
What is the COGS formula for a handmade seller?
COGS for handmade sellers equals Beginning Inventory + Purchases − Ending Inventory. Beginning inventory is what you had on January 1, purchases are materials bought during the year, and ending inventory is the value of materials, WIP, and finished goods remaining on December 31. The result is the cost of what you actually sold — not just what you bought. Craftybase calculates this automatically and outputs the figures needed for Schedule C Part III.
Does my own labour count as COGS on Schedule C?
No. As a sole proprietor, you cannot deduct your own labour as a cost on Schedule C — you don't pay yourself a wage in the traditional sense. Line 37 (Cost of Labour) is only for amounts paid to employees or contractors who helped manufacture your products. Your time building your business is real, but it doesn't create a deductible expense on a sole proprietor return. If you hired someone to help make products, that goes here.
What inventory valuation method should handmade sellers use?
Most handmade sellers should use the Cost method (Line 33, first checkbox). This means valuing your inventory at what you actually paid for it — your material costs. It's the simplest approach and the one most small product businesses use. The "Lower of Cost or Market" method applies if your inventory value has dropped below what you paid (unusual for most makers). Stick with Cost unless you have a specific reason to do otherwise.
Do work-in-progress items count as inventory on Schedule C?
Yes. Work-in-progress (products you've started but not yet finished) counts as inventory at year-end. That batch of soap curing in the mould, the candles poured but not labelled, the jewellery pieces mid-assembly — these all have a real material cost that belongs in your ending inventory figure. Most makers skip WIP, which understates their ending inventory and overstates their COGS. It may be a small amount, but it should be included.
How does Craftybase help with Schedule C COGS reporting?
Craftybase tracks your material inventory and manufacturing throughout the year, so the numbers for Schedule C Part III are always current — not something you scramble to reconstruct in April. The COGS report generates your beginning inventory, purchases, and ending inventory figures formatted for your tax return. Many makers say it eliminates the tax-time panic entirely: the data is already there, already calculated, ready to drop into Part III.
Schedule C Part III doesn’t have to be the section you dread. The formula is simple once you understand what “inventory” actually means for a maker: materials, work-in-progress, and finished goods — counted at the start and end of the year, with everything you purchased in between.
The hard part isn’t the maths. It’s having the data. That’s where tracking your inventory properly throughout the year pays off in April.
Craftybase keeps that data organised so the COGS report is ready when you need it — not something you’re reconstructing from memory and receipts at midnight on April 14.
