This time of year I see a lot of “my QB COGS is not the same as what is calculated on the IRS Form xx” questions.

That is because QB calculates COGS differently than the IRS requires it to be calculated.

QB keeps a calculated average cost that spans the life of the file. Prices you paid 4 years ago are still used when QB calculates the average.

The IRS requires that cost is booked for the current year only.

So what the IRS does is ask you to determine:

* the value of inventory on 1 Jan (this is the ending inventory value from last year – make sure it is the same as what you reported last year when you filed – taken from the balance sheet)

* the value of inventory on 31 Dec for the current year (taken from the balance sheet)

* the total of purchases for inventory for the year

Then you add purchases to the Jan 1 value to get the total value of annual inventory.

Then you subtract the ending inventory value – that tells you what the cost of goods you sold was.

Using the IRS method will almost always make the IRS COGS higher, which in turn means profit will be lower, and profit is what you pay tax on.

Where it is easy to mess things up is when you go to calculate the total purchases. If, … if you use inventory items for more than just what you sell (like supplies, etc), you have to modify the purchases report to only show the items you bought for resale.