Form 1125-A Cost of Goods Sold

Form

1125-A

Cost of Goods Sold
OMB No. 1545-XXXX

(December 2011)
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Department of the Treasury
Internal Revenue Service
Name

Attach to Form 1120, 1120-C, 1120-F, 1120-S, 1065, and 1065-B.
Employer identification number

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Inventory at beginning of year
Purchases . . . . . .
Cost of labor . . . . .

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Additional section 263A costs (attach schedule) .
Other costs (attach schedule) . . . . . .
Total. Add lines 1 through 5 . . . . . . .

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Inventory at end of year .

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Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2 or the
appropriate line of your tax return (see instructions) . . . . . . . . . . . . . . .

9a

Check all methods used for valuing closing inventory:
(i)
Cost
(ii)
(iii)

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Lower of cost or market
Other (Specify method used and attach explanation.) ▶

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Check if there was a writedown of subnormal goods
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Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970)

d

If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed
under LIFO . . . . . . . . . . . . . . . . . . . . . . . . . . .
If property is produced or acquired for resale, do the rules of section 263A apply to the corporation? .

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9d
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Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If “Yes,”
attach explanation
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For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 55988R

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Yes

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Yes

No

Form 1125-A (12-2011)

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Page 1 of 2 Instructions for Form 1125-A

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2011

Instructions for Form 1125-A

Department of the Treasury
Internal Revenue Service

Cost of Goods Sold
Section references are to the Internal
Revenue Code unless otherwise noted.

method to account for inventoriable items
in the same manner as materials and
supplies that are not incidental.

General Instructions

Under this accounting method,
inventory costs for raw materials
purchased for use in producing finished
goods and merchandise purchased for
resale are deductible in the year the
finished goods or merchandise are sold
(but not before the year you paid for the
raw materials or merchandise, if you are
also using the cash method).

Purpose of Form
Use Form 1125-A to calculate and report
the cost of goods sold.

Who Must File
Complete and attach Form 1125-A to
Form 1120, 1120-C, 1120-F, 1120-S,
1065, or 1065-B, 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. If
inventories are required, you generally
must use an accrual method of
accounting for sales and purchases of
inventory items.
Exception for certain taxpayers. If you
are a qualifying taxpayer or a qualifying
small business taxpayer (defined below),
you can adopt or change your accounting
method to account for inventoriable items
in the same manner as materials and
supplies that are not incidental.
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 by a
corporation for use in its trade or business
or in an activity engaged in for property.
See Section 263A uniform
capitalization rules in the
CAUTION instructions for your tax return
before 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.
Exception for certain taxpayers. If you
are a qualifying taxpayer or a qualifying
small business taxpayer (defined below),
you can adopt or change your accounting

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Oct 12, 2011

If you account for inventoriable items
in the same manner as materials and
supplies that are not incidental you can
currently deduct expenditures for direct
labor and all indirect costs that would
otherwise be included in inventory costs.
Qualifying taxpayer. A qualifying
taxpayer is a taxpayer that, (a) for each
prior tax year ending after December 16,
1998, has average annual gross receipts
of $1 million or less for the 3 prior tax
years and (b) its business is not a tax
shelter (as defined in section 448(d)(3).
See Rev. Proc. 2001-10, 2001-2 I.R.B.
272.
Qualifying small business taxpayer.
A qualifying small business taxpayer is a
taxpayer (a) that, for each prior tax year
ending on or after December 31, 2000,
has average annual gross receipts of $10
million or less for the 3 prior tax years, (b)
whose principal business activity is not an
ineligible activity, and (c) whose busines
is not a tax shelter (as defined in section
448(d)(3). See Rev. Proc. 2002-28,
2002-18, I.R.B. 815.
Additional Information For
additional guidance on this method of
accounting, see Pub. 538, Accounting
Periods and Methods. For guidance on
adopting or changing to this method of
accounting, see the Instructions for Form
3115.

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.
Cat. No. 55988R

Line 2. Purchases
If you account for inventoriable items in
the same manner as materials and
supplies that are not incidental, enter
amounts paid for all raw materials and
merchandise during the tax year on line 2.
The amount you can deduct for the tax
year is figured on line 8.
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.

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, additional section
263A costs are generally those costs ,
other than interest, that were not
capitalized under your method of
accounting immediately prior to the
effective date of section 263A, but are
now 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.
Cooperatives. Cooperatives should
include the following items on line 5.
Attach a schedule listing details of the
amounts included.
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 such tax
year. A per-unit retain allocation is any
allocation from a cooperative to a patron
with respect to products marketed for him

Page 2 of 2 Instructions for Form 1125-A

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without reference to the cooperative net
earnings. A qualified per-unit retain
certificate any per-unit retain certificate
which 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 Form
1120-C for a special rule for figuring the
cooperative’s tax in the year of
redemption of a nonqualified per-unit
retain certificate.

Line 7. Inventory at End of
Year
See Regulations sections 1.263A-1
through 1.263A-3 for details on figuring
the amount of additional section 263A
costs to be included in ending inventory. If
your account for inventoriable items in the
same manner as materials and supplies
that are not incidental, enter on line 7 the
portion of its raw materials and
merchandise purchased for resale that
was included in the total on line 6 but was
not sold during the year.

Lines 9a Through 9f.
Inventory Valuation
Methods
Inventories can be valued at:
• Cost,
• Cost or market value (whichever is
lower), or

• Any other method approved by the IRS

that conforms to the requirements of the
applicable regulations cited below.
However, if you are using the cash
method of accounting, you are required to
use cost.
Rolling average method. Generally, a
rolling average method that is used to
value inventories for financial accounting
purposes does not clearly reflect income
for federal income tax purposes.
However, if a filer uses the average cost
method for financial accounting purposes,
there are two safe harbors under which
this method will be deemed to clearly
reflect income for federal income tax
purposes. See Rev. Proc. 2008-43,
2008-30 I.R.B.186 as modified by Rev.
Proc. 2008-52, 2008-36 I.R.B. 587, and
as modified by Rev. Proc. 2011-14,
2011-4, I.R.B. 330, for details.
Filers that use erroneous valuation
methods must change to a method
permitted for federal income tax
purposes. Use Form 3115 to make this
change.
Line 9a. On line 9a, check the method(s)
used for valuing inventories. Under lower
of cost or market, the term “market” (for
normal goods) means the current bid
price prevailing on the inventory valuation
date for the particular merchandise in the
volume usually purchased by the filer. For
a manufacturer, market applies to the
basic elements of cost — raw materials,
labor, and burden. If section 263A
applies, the basic elements of cost must
reflect the current bid price of all direct
costs and all indirect costs properly
allocable to goods on hand at the
inventory date.
Inventory may be valued below cost
when the merchandise is unsalable at
normal prices or unusable in the normal
way because the goods are subnormal
due to damage, imperfections, shopwear,

change of style, odd or broken lots, or
other similar causes, including
second-hand goods taken in exchange.
The goods may be valued at the bona
fide selling price, minus the direct cost of
disposition (but not less than scrap
value). Bona fide selling price means
actual offering of goods during a period
ending not later than 30 days after
inventory date.
Lines 9d and 9e. LIFO method. If this is
the first year the Last-in, First-out (LIFO)
inventory method was either adopted or
extended to inventory goods not
previously valued under the LIFO method
provided in section 472, attach Form 970,
Application To Use LIFO Inventory
Method, or a statement with the
information required by Form 970. Also
check the LIFO box on line 9c. On line 9d,
enter the amount of total closing
inventories computed under section 472.
Estimates are acceptable.
If you changed or extended your
inventory method to LIFO and had to
write up the opening inventory to cost in
the year of election, report the effect of
the write-up as other income, on your
applicable return, proportionately over a
3-year period that begins with the year of
the LIFO election.
Note. Corporations using the LIFO
method that make an S corporation
election or transfer LIFO inventory to an S
corporation in a nonrecognition
transaction may be subject to an
additional tax attributable to the LIFO
recapture amount. See the instructions for
Form 1120 Schedule J, line 9.
For more information on inventory
valuation methods, see Pub. 538. For
more information on changes in the
method of accounting for inventory, see
Form 3115 and the Instructions for Form
3115.

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