Form 1125-A — What Is It and When Do You Need It?
If your handmade business sells physical products, Form 1125-A is how you report your cost of goods sold to the IRS. Here's exactly what each line means — and a worked example for makers.
Last updated: March 2026
If you make and sell physical products — candles, soap, jewelry, ceramics, whatever your craft is — you’re not just a retailer. You’re a manufacturer. And that distinction matters a lot at tax time.
For most product-based business structures (corporations, partnerships, S-corps), the IRS requires you to report your cost of goods sold on a separate attachment called Form 1125-A. It’s a single-page form, but if you’ve never seen it before, it can look confusing.
This guide walks you through every field — with a plain-English explanation and a worked example using a real handmade seller scenario.
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What is Form 1125-A?
Form 1125-A is an IRS tax form that businesses use to report their cost of goods sold (COGS) for the tax year. The figure you calculate here gets carried over to your main business return, where it reduces your gross receipts to give you gross profit.
In other words: it’s how the IRS knows what it actually cost you to produce the goods you sold.
Who Needs to File Form 1125-A?
Form 1125-A is typically filed by corporations, partnerships, and S corporations that carry inventory. It gets attached to the parent return — one of Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B.
If you’re a sole proprietor filing under a pass-through structure, you’ll report COGS differently — on Schedule C, not Form 1125-A. See our Schedule C guide if that’s your situation.
The form is only required for businesses that carry inventory. If you’re purely a service business with no physical goods, you won’t need it.
Not sure which entity structure applies to your business? See our guide to choosing the right structure for your handmade business.
What Counts as COGS for a Maker?
Cost of goods sold for a handmade business includes every direct cost tied to producing the items you actually sold during the year. That means:
- Raw materials — the wax, fragrance oils, and wicks in a candle; the silver wire and gemstones in jewelry; the clay and glazes in ceramics
- Direct labor — wages paid to anyone who helps with production (or an owner’s time, if you track it)
- Packaging — boxes, labels, tissue paper that go directly with the product
- Production supplies — molds, tools consumed in production
COGS does not include indirect costs like rent, marketing, or your Etsy fees. Those are operating expenses, reported elsewhere on your return. The difference between direct and indirect expenses is worth understanding before you fill out the form.
A Worked Example — Candle Maker Filing Form 1125-A
Let’s say Sarah runs a candle business structured as an S corporation. Here’s how her 2025 numbers look:
| Line item | Amount |
|---|---|
| Inventory at start of year | $3,200 |
| Materials purchased during year | $18,500 |
| Direct labor (part-time production assistant) | $4,800 |
| Other production costs (mold depreciation, etc.) | $600 |
| Total (add lines 1–5) | $27,100 |
| Inventory at end of year | $4,100 |
| Cost of goods sold (line 6 minus line 7) | $23,000 |
That $23,000 is what Sarah reports as her COGS for the year. It flows into her Form 1120S to calculate gross profit.
The formula itself is simple: Beginning Inventory + Purchases + Labor + Other Costs − Ending Inventory = COGS.
What makes it tricky for makers is having accurate numbers for each input — particularly ending inventory and labor. If you track these throughout the year (rather than scrambling in April), filling out Form 1125-A takes minutes, not hours.
How to Fill Out Form 1125-A
Download the current version of Form 1125-A from the IRS website. The form has 9 lines — here’s what each one means.
Line 1 — Inventory at Beginning of Year
The value of inventory you held on January 1 (or the first day of your tax year). This should match the closing inventory figure from your prior year’s return. See our guide on how to find your end-of-year inventory value for how to calculate this accurately.
Line 2 — Purchases
The total cost of all raw materials and supplies purchased during the tax year that are used to make your products. For makers, this is typically your biggest line item — all the wax, yarn, resin, metals, or other materials you bought to produce goods.
Line 3 — Cost of Labor
Wages and salaries paid to employees directly involved in production. If you hired someone part-time to help pour candles or assemble jewelry kits, those wages go here. For detailed guidance on calculating this, see our post on how to calculate your handmade labor costs.
Note: if you’re the sole owner and don’t pay yourself a formal wage, this line may be $0 for your business structure. That’s normal.
Line 4 — Additional Section 263A Costs
Section 263A, also known as the Uniform Capitalization Rules (UNICAP), requires certain businesses to capitalize indirect costs into inventory rather than deducting them immediately. For most small handmade businesses, this doesn’t apply — but if you have significant overhead allocated to production, check with your accountant.
Line 5 — Other Costs
Any production-related costs not captured above. Examples include freight on incoming materials, production-specific equipment maintenance, or storage costs for materials. Attach a schedule detailing these if you enter an amount.
Line 6 — Total (Lines 1 through 5)
Add up lines 1 through 5. This is your total inventory available for the year.
Line 7 — Inventory at End of Year
The value of finished goods and materials still on hand at December 31. Getting this right matters — it directly changes your COGS figure. A higher ending inventory means lower COGS, and vice versa.
Line 8 — Cost of Goods Sold
Subtract line 7 from line 6. This is your COGS for the year. Carry this number to the appropriate line of your main tax return (Form 1120, page 1, line 2 — or the equivalent for your form type).
Line 9 — Methods for Valuing Closing Inventory
This is the most detailed section. It asks how you valued your ending inventory.
9a — Valuation method used:
- Cost — you value inventory at what it cost to produce or purchase. The most common method for handmade sellers.
- Lower of cost or market — if the market value of your inventory has dropped below what you paid for it (e.g., discontinued materials), you’d use this.
- Other — methods like LIFO (Last In, First Out) or the Retail Inventory Method. Check all methods that apply.
For a deeper look at these options, see our guide to FIFO, LIFO, and weighted average cost methods.
9b — Writedown of subnormal goods
Check this if you had damaged, defective, or obsolete inventory that you wrote down in value. Attach an explanation.
9c — LIFO adoption
If you adopted the LIFO method for the first time this tax year, check here and attach Form 970.
9d — LIFO closing inventory amount
If you use LIFO, enter the value of your closing inventory calculated under that method.
9e — Section 263A applicability
If your business produces or acquires property for resale, the UNICAP rules (Section 263A) may apply. Check Yes or No and attach a schedule if applicable.
9f — Changes in valuation method
If you changed your method for determining quantities, cost, or valuations between your opening and closing inventory, check Yes and attach an explanation. The IRS wants consistency year to year — changes require disclosure.
When Is Form 1125-A Due?
Form 1125-A isn’t filed on its own. It’s attached to your business return:
- March 15 — for partnerships (Form 1065) and S corporations (Form 1120S)
- April 15 — for C corporations (Form 1120)
Extensions are available. But the earlier you have your inventory numbers locked in, the less stressful the deadline gets. A year-end inventory checklist can help you close out December without last-minute scrambling.
Tips for Getting Your Numbers Right
A few things worth keeping in mind:
- Track inventory movements in real time. Doing a count on December 31 and working backwards is harder than it sounds. Recording material usage as you produce throughout the year gives you accurate numbers automatically.
- Don’t mix up COGS and COGM. Cost of goods manufactured (COGM) covers what it costs to make your products. COGS is what it cost to make the products you sold. Unsold inventory stays on your balance sheet. See our post on the difference between COGS and COGM for a clear breakdown.
- Be consistent with your valuation method. The IRS expects you to use the same method from year to year. If you need to change, disclose it on line 9f.
- When in doubt, ask a tax professional. Section 263A in particular can get complicated. The cost of a CPA review is almost always less than the cost of getting it wrong.
Using Software to Complete Form 1125-A
If you’re tracking inventory manually in spreadsheets, pulling these numbers at year-end is painful. You’re digging through purchase receipts, counting stock, and hoping your math adds up.
Craftybase’s COGS software handles the tracking automatically. As you record material purchases, manufacturing runs, and sales throughout the year, the system calculates your COGS in real time. When it’s time to fill out Form 1125-A, every figure you need is already there — beginning inventory, purchases, labor costs, ending inventory.
It’s the difference between spending a weekend reconstructing records and spending twenty minutes confirming numbers you already have.
Frequently Asked Questions
Who needs to file Form 1125-A?
Corporations, partnerships, and S corporations that carry inventory are required to file Form 1125-A alongside their main business return. It applies to any product-based business — including handmade sellers structured as LLCs taxed as corporations or partnerships. Sole proprietors don't use this form — they report COGS directly on Schedule C instead.
What counts as COGS for a maker or handmade seller?
COGS for a maker includes all direct costs of producing the goods you sold — raw materials (wax, wire, clay, resin), direct labor, and production-specific supplies like molds or packaging that ships with the product. It does not include indirect costs like Etsy fees, advertising, shipping labels, or general overhead. Those are operating expenses reported elsewhere on your return.
Does an Etsy seller need to file Form 1125-A?
It depends on your business structure. Most Etsy sellers file as sole proprietors, which means they report COGS on Schedule C — not Form 1125-A. If your Etsy shop is structured as an S corp, a partnership, or a C corp, then yes, Form 1125-A applies. If you're unsure which category you fall into, a tax professional can clarify this quickly based on how your business is registered.
How do I calculate beginning inventory for Form 1125-A?
Your beginning inventory is the same value as your ending inventory from the prior year's return — they must match. If this is your first year filing, you'll need to calculate the cost of all materials and finished goods you held on the first day of your tax year. Craftybase tracks this automatically if you've been recording purchases and manufacturing runs throughout the year.
What inventory valuation method should a maker use?
Most handmade sellers use the cost method — valuing inventory at what it actually cost to produce or purchase. It's the simplest and most straightforward. FIFO (First In, First Out) is common when material prices fluctuate. LIFO is less common and comes with additional IRS reporting requirements. Whatever method you choose, you must use it consistently from year to year. Switching requires IRS notification.
Can I deduct all my material purchases as expenses instead of tracking COGS?
No — and this is a mistake many handmade sellers make. You can only deduct the cost of materials used to make products you actually sold, not everything you purchased. Materials still sitting in your inventory at year-end are an asset, not an expense. Claiming all purchases as expenses overstates your deductions and understates your profit, which creates real IRS risk. See our post on why claiming materials as expenses is a bad idea for a full explanation.
Wrapping Up
Form 1125-A is one of those things that sounds worse than it is. The form itself is a single page. The math is just four numbers added together, with one subtracted at the end.
The hard part — for most makers — is having accurate numbers ready. Beginning inventory, purchases, labor, ending inventory. If you’re tracking these throughout the year in a tool like Craftybase COGS software, the form fills in quickly. If you’re not tracking them at all, tax time becomes an exercise in reconstruction.
Good records are the real answer here. And if you’re ever in doubt about your specific situation, a conversation with a CPA who works with product-based businesses is worth the time.
