This Form 1125-A guide explains the IRS Cost of Goods Sold. Form 1125-A supports the cost of goods sold computation for covered business returns. Opening inventory, purchases, production-related costs and closing inventory must fit the accounting method and instructions. Cost of goods sold should not also be deducted a second time as an unrelated ordinary expense.
Reviewed October 31, 2026. This is an independent guide. The version and availability information below identifies the IRS documents used for this page.
What Form 1125-A does and who prepares it
A business filer uses the cost-of-goods-sold schedule when the applicable return requires it.
For the connected reporting route, see Form 1065. Keep the role of that document separate from the task explained on this page.
| Official form | Form 1125-A |
|---|---|
| IRS title | Cost of Goods Sold |
| Guide period | the applicable reporting period |
| Target version | Nov 2024 |
| Availability | Current IRS catalog PDF |
| Last checked | October 31, 2026 |
Get the Form 1125-A PDF and check its status
Use the IRS source to confirm the document before completing a real filing. The download link is a reference to the official file; it is not a statement that every copy inside the PDF may be printed and submitted. Follow any instructions about electronic filing, scannable copies, recipient copies or attachments.
Which version of Form 1125-A should you use?
This form follows a revision or continuing-use format rather than a new title for every calendar year. Check the revision printed on the document and the period requested inside it. A revision date, transaction date and tax year are different pieces of information. The current document should be read with the instructions that apply to the actual transaction or return.
Records to gather for Form 1125-A
- Inventory records.
- Purchase ledger.
- Production cost records.
- Accounting-method support.
- Beginning and ending balances.
Keep a working reconciliation with these records. It should show the source of each reported item, any correction made before filing and the reason a different amount appears on a connected form. This is especially useful when a statement is corrected or a prior-year balance continues into the current calculation.
How to work through Form 1125-A
- Confirm applicability. Start with the purpose, filer category and version of the form. Complete any eligibility or applicability question before spending time on the numerical calculation.
- Prepare the source workpapers. Gather the records listed below and reconcile their totals. Keep prior-year balances, current-year transactions and estimated payments separate where they serve different purposes.
- Complete dependent calculations first. When a line refers to another form, schedule or worksheet, finish that supporting calculation first. Preserve any classification, limitation and carryforward information.
- Follow the line sequence. Use the actual line labels and arithmetic in the applicable form. A line number from an older version may refer to something different after a revision.
- Reconcile the filing package. Check names, identifying numbers, tax periods, totals and required attachments. Then use the filing method, signature process and deadline that apply to this filer and form.
Form-specific IRS instructions and reporting details
The following points retain the operative wording of the IRS documents linked above. Read each point with its stated conditions and the applicable form version. References to another form or section describe a connected requirement; they do not mean that every reader must file every referenced document.
Who Must File Filers of Form 1120, 1120-C, 1120-F, 1120S, or 1065 must complete and attach Form 1125-A if the applicable entity reports a deduction for cost of goods sold.
Inventories Generally, inventories are required at the beginning and end of each tax year if the production, purchase, or sale of merchandise is an income-producing factor. See Regulations section 1.471-1(a).
If inventories are required, you generally must use an accrual method of accounting for sales and purchases of inventory items. Exception for small business taxpayers. A small business taxpayer can account for inventory by treating the inventory as non-incidental materials and supplies (line 9a(iv)), or conforming to its treatment of inventory in an applicable financial statement (as defined in section 451(b)(3)) (line 9a(v)).
If it does not have an applicable financial statement, a small business taxpayer can use the method of accounting used in its books and records prepared according to its accounting procedures (line 9a(vi)). See the discussion on small business taxpayers in the instructions for your tax return. Also see sections 448(c) and 471(c). For additional guidance on methods of accounting, see Pub. 538, Accounting Periods and Methods. For guidance on changing methods of accounting, see Form 3115, Application for Change in Accounting Method, and the Instructions for Form 3115.
Additional reporting conditions
Uniform capitalization rules. The uniform capitalization rules of section 263A generally require you to capitalize, or include in inventory, certain costs incurred in connection with the following. • The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business. • Real property or personal property (tangible and intangible) acquired for resale. • The production of real property and tangible personal property for use in its trade or business or in an activity engaged in for profit.
A small business taxpayer is not required to capitalize costs under section 263A. See section 263A(i). See the discussion on section 263A uniform capitalization rules in the completing Form 1125-A. Also see Regulations sections 1.263A-1 through 1.263A-3. See Regulations section 1.263A-4 for rules for property produced in a farming business and Pub. 225, Farmer’s Tax Guide.
Specific Instructions Line 1. Inventory at Beginning of Year If you are changing your method of accounting for the current tax year, you must refigure last year’s closing inventory using the new method of accounting. Enter the result on line 1. If there is a difference between last year’s closing inventory and the refigured amount, attach an explanation and take it into account when figuring any section 481(a) adjustment.
Line 2. Purchases Reduce purchases by items withdrawn for personal use. For a partnership, the cost of these items should be shown on Schedule K and Schedule K-1 as distributions to partners.
Calculations and supporting information
Line 4. Additional Section 263A Costs If you elected a simplified method of accounting, enter on line 4 the balance of section 263A costs paid or incurred during the tax year not includible on lines 2, 3, and 5. If you elected the simplified production method or the modified simplified production method, additional section 263A costs are generally those costs, other than interest, that are not included in your section 471 costs but that are required to be capitalized under section 263A. For details, see Regulations section 1.263A-2(b).
If you elected the simplified resale method, additional section 263A costs are generally those costs incurred with respect to the following categories. • Off-site storage or warehousing. • Purchasing. • Handling, such as processing, assembling, repackaging, and transporting. • General and administrative costs (mixed service costs).
Line 5. Other Costs Enter on line 5 any costs paid or incurred during the tax year not entered on lines 2 through 4. Attach a statement listing details of the costs.
Special Rules for Cooperatives Cooperatives are allowed to deduct certain per-unit retain allocations. Include these costs on line 5. Attach a statement listing details of per-unit retain allocations paid in: • Qualified per-unit retain certificates, • Money or other property (except nonqualified per-unit certificates), and • Nonqualified per-unit retain certificates redeemed this year.
Exceptions and related reporting
Per-unit retain allocations. A cooperative is allowed to deduct from its taxable income amounts paid during the payment period for the tax year as per-unit retain allocations to the extent paid in money, qualified per-unit retain certificates, or other property with respect to marketing occurring during the tax year. A per-unit retain allocation is any allocation from a cooperative to a patron for products marketed for the patron without reference to the cooperative net earnings.
A qualified per-unit retain certificate is any per-unit retain certificate that the distributee has agreed to take into account at its stated dollar amount. Nonqualified per-unit retain certificates redeemed this year. Include the amount paid in money or other property (except amounts already included as per-unit retain certificates) to patrons to redeem nonqualified per-unit retain certificates. No deduction is allowed at the time of issuance for a nonqualified per-unit retain certificate. However, the cooperative may take a deduction in the year the certificate is redeemed, subject to the stated dollar amount of the certificate.
See section 1383. Also see the instructions for Form 1120-C, line 30h, for a special rule for figuring the cooperative’s tax in the year of redemption of a nonqualified per-unit retain certificate.
Line 8. Cost of Goods Sold Enter the amount from line 8 on your tax return as follows. Filers of Form 1120, 1120-C, 1120S, and 1065, enter cost of goods sold on page 1, line 2. Filers of Form 1120-F, enter cost of goods sold on Section II, line 2.
Further form details
Line 9. Inventory Valuation Methods Complete line 9 as follows. Line 9a. Inventory methods. Check all applicable boxes on lines 9a(i) through 9a(iii) to indicate how the value of an inventory item is figured. For certain small business taxpayers that have adopted or changed to an alternative accounting method that is an exception to the general inventory requirements described above, check a box on lines 9a(iv) through 9a(vi) in lieu of checking an applicable box on lines 9a(i) through 9a(iii). See Regulations sections 1.471-1(b)(3) through (6) and your accounting procedures.
The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden for business taxpayers filing this form is approved under OMB control number 1545-0123 and is included in the estimates shown in the instructions for their business income tax return. If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. See the instructions for the tax return with which this form is filed.
Reading the lines and boxes
These selected labels come from the linked target PDF. They are a reading aid, not a replacement for the full line instructions or a completed calculation. Match the label and document version before transferring any amount.
| Line or box | Label in the source form | What to check |
|---|---|---|
| 1 | Inventory at beginning of year | Use the date or tax period requested by this particular field. A payment date, acquisition date and return year can describe different facts. |
| 3 | Cost of labor | Use the supported tax basis or cost measure requested by the instructions. Book value, original purchase price and adjusted tax basis can differ. |
| 4 | Additional section 263A costs (attach schedule) | Use the supported tax basis or cost measure requested by the instructions. Book value, original purchase price and adjusted tax basis can differ. |
| 5 | Other costs (attach schedule) | Use the supported tax basis or cost measure requested by the instructions. Book value, original purchase price and adjusted tax basis can differ. |
| 6 | Total. Add lines 1 through 5 | Follow the stated arithmetic and line references in sequence. Complete the referenced inputs first and retain the worksheet supporting the result. |
Further selected fields
| Line or box | Label in the source form | What to check |
|---|---|---|
| 7 | Inventory at end of year | Use the date or tax period requested by this particular field. A payment date, acquisition date and return year can describe different facts. |
| 8 | Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2, or the appropriate | Follow the stated arithmetic and line references in sequence. Complete the referenced inputs first and retain the worksheet supporting the result. |
| 9a | Check all methods used for valuing closing inventory. See instructions. | Check the applicable line instructions and keep the source workpaper with the return records. Transfer only the information that matches the field and reporting period. |
A practical example
A business with goods for sale closes its inventory records and reconciles purchases and production costs. The preparer checks the inventory method and transfers the supported cost-of-goods-sold amount to the entity return.
This example illustrates the order of the review. It does not assume an unverified deduction, exemption, treaty rate or final tax amount. The applicable form instructions and the actual records determine the result.
Common mistakes to avoid with Form 1125-A
- Avoid deducting the same cost both in cost of goods sold and as another expense.
- Check inventory valuation and accounting consistency.
- Reconcile the final amount with the main business return.
Questions about Form 1125-A
Does receiving or downloading this form mean I must file it?
A business filer uses the cost-of-goods-sold schedule when the applicable return requires it. The form purpose and the applicable filing or furnishing conditions determine the action. Downloading a blank PDF does not itself create a filing obligation or establish eligibility for a tax benefit.
Is the revision date always the same as the tax year?
No. Some forms show a tax year, while continuing-use forms show a revision date and ask separately for the reporting period. Check the actual document and instructions. Do not relabel a payment or transaction solely because it was reported in a later calendar year.
What should I do if the underlying information is wrong?
Avoid deducting the same cost both in cost of goods sold and as another expense. Keep the original record and the correction trail. The issuer correction process, an amended return and an updated certificate can be different procedures. Choose the process that matches the document and the actual error.
Which records should I keep with the completed form?
Retain the source documents, applicable worksheets, submitted version and filing or furnishing confirmations. For this form, the working file should include inventory records, purchase ledger, production cost records. Keep continuing balances and prior-year support for as long as they remain relevant under the applicable recordkeeping rules.
Related forms and next steps
Use these guides when the connected issue applies to your records. Each page has its own purpose, reporting year and availability status.