1125-A Cost of Goods Sold

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Form

1125-A

Cost of Goods Sold

(Rev. November 2018)

OMB No. 1545-0123

Attach to Form 1120, 1120-C, 1120-F, 1120S, or 1065.
▶ Go to www.irs.gov/Form1125A for the latest information.
▶

Department of the Treasury
Internal Revenue Service
Name

Employer identification number

DRAFT AS OF
August 2, 2018
DO NOT FILE

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Inventory at beginning of year
Purchases . . . . . .

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Cost of labor . . . . . . . . . . .
Additional section 263A costs (attach schedule) .
Other costs (attach schedule) . . . . . .

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Total. Add lines 1 through 5 .
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

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b

Lower of cost or market
(ii)
Other (Specify method used and attach explanation.) ▶
(iii)
Check if there was a writedown of subnormal goods
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c

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

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d

If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed
under LIFO . . . . . . . . . . . . . . . . . . . . . . . . . . .
9d
If property is produced or acquired for resale, do the rules of section 263A apply to the entity? See instructions .

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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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Section references are to the Internal
Revenue Code unless otherwise noted.

What's New
Small business taxpayers. For tax years
beginning after December 31, 2017, the
following apply.
• A small business taxpayer (defined
below), can adopt or change its accounting
method to account for inventories in the
same manner as nonincidental material and
supplies.
• A small business taxpayer is not required
to capitalize costs under section 263A.

General Instructions
Purpose of Form
Use Form 1125-A to calculate and deduct
cost of goods sold for certain entities.

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. If
inventories are required, you generally
must use an accrual method of accounting
for sales and purchases of inventory items.

Exception for certain taxpayers. A small
business taxpayer (defined below), can
adopt or change its accounting method to
account for inventories in the same manner
as material and supplies that are nonincidental, or conform to its treatment of
inventories in an applicable financial
statement (as defined in section 451(b)(3))
(or the method of accounting used in its
books and records prepared in accordance
with its accounting procedures, if
applicable financial statements are not
used). See section 471(c)(1).
If you account for inventories in the same
manner as nonincidental materials and
supplies, 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).
Under this accounting method, you can
currently deduct expenditures for direct
labor and all indirect costs that would
otherwise be included in inventory costs.
See the instructions for lines 2 and 7.
A small business taxpayer claiming
exemption from the requirement to keep
inventories is changing its method of
accounting for purposes of section 481.
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 Form 3115, Application for
Change in Accounting Method, and its
instructions.

For Paperwork Reduction Act Notice, see instructions.

Cat. No. 55988R

Yes

No

Yes

No

Small business taxpayer. A small
business taxpayer is a taxpayer that (a) has
average annual gross receipts of $25
million or less (indexed for inflation) for the
3 preceding tax years, and (b) is not a tax
shelter (as defined in section 448(d)(3)). See
section 471(c).
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 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
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.

Form 1125-A (Rev. 11-2018)

Form 1125-A (Rev. 11-2018)

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.

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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 him without reference to the
cooperative net earnings. A qualified perunit 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.

Filers that use erroneous valuation
methods must change to a method
permitted for federal income tax purposes.
Use Form 3115 to make this change. See
the Instructions for Form 3115. Also see
Pub. 538.
Line 9a. Method of valuing closing
inventory. 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 secondhand 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 9c and 9d. 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. 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.

DRAFT AS OF
August 2, 2018
DO NOT FILE

Line 2. Purchases

If you account for inventoriable items in the
same manner as nonincidental materials
and supplies, 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.

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.

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 you account
for inventoriable items in the same manner
as nonincidental materials and supplies,
enter on line 7 the portion of your raw
materials and merchandise purchased for
resale that was included in the total on line
6 but was not sold during the year.

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.

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.

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Form 1125-A (Rev. 11-2018)

Note: Entities 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 11.
Line 9e. If property is produced or
acquired for resale and the rules of section
263A apply to the corporation, cooperative,
partnership, or other applicable entity,
check the “Yes” box on line 9e.

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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.

DRAFT AS OF
August 2, 2018
DO NOT FILE

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