COGS on P&L for a service only business

[AZ-Tax]

Is COGS suppose to be in a S-Corp's P&L when there is no product(s) but only services?

[BOB W]

Most times there is only operating expenses. COGS can & probably should be Zero.

[jaybird]

Most times yes, this is from PUB 334, Page 27 - COGS

This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you.

It's a possibility....likely, not really!

[S T]

Just a footnote- For Service oriented business that does not Manufactuer Products, Make sure you do not place "Wages/Salaries" under COG - they belong under the Expense side - not COG - it would be an almost "certain" audit

Sandy

[JG EA]

Just a footnote- For Service oriented business that does not Manufactuer Products, Make sure you do not place "Wages/Salaries" under COG - they belong under the Expense side - not COG - it would be an almost "certain" audit

Sandy

Would you feel this way with 1099's also? I have one company that has many sub-contractors (normal in the business) and also employees. I often put the subs on COG's since they seem like they belong there (they do the work of getting the product to market).
I put the wages on the wages line though because I know the IRS double checks wages with 941/940's.

Your opinion on this?

[oceanlovin'ea]

I was under the impression that the only items that should be on page 2 were what was part of the work done. For example, if you are selling things the cost of what you are selling. I think the freight charges to get that merchandise to you is also included on page 2.

For a service business, I don't usually put anything there. For example, our tax and accounting businesses would have nothing on page 2. I do have a lawn service business and a few years ago I started putting the mulch, plants or fertilizer he purchased to put on a particular clients property as COGS. That is not general supplies for his business..it was for a certain client. Something I read or heard at a seminar prompted me to do that.

I don't think I would put subcontractors on page 2. There is a line on the schedule C for contract labor. I would use that. You can always detail that line to show each contractor and how much they were paid.

Linda, EA

[Gary2]

Pub. 334 (Tax Guide for Small Business) has a section on calculated COGS. I read it as putting applicable wages on line 37 and freight-in on line 39. Shipping to customers is not part of COGS.

[Golden Rocket]

COGS Exists

I'm assuming for purposes of this discussion, we should focus on "service only" business, and not a business such as air conditioning service, or a locksmith, or any business where some degree of purchases must occur.

For a service only business, COGS can definitely exist.

At a minimum, incremental cost involved in delivering the service itself should be COGS. A wrecker service has a slogan "You maul 'em, We haul 'em". Although a substantial portion of delivering the service would be vehicular cost on the tow truck, including depreciation, this should be probably considered "indirect." If the owner sends his son out on a service call, and pays his son accordingly, then his son's wages should be in COGS.

Be careful, as anything in the COGS section can be considered an "inventoriable" cost even though there is no physical inventory. What this means is they can force an inventoriable cost to absorb some of the indirect cost associated with it. For example, if there is any labor which is unbilled at the end of the year, they can force fringes on that labor to be carried as "inventory." (nondeductible until the following year)

[oceanlovin'ea]

I guess the inventory thing is why I put most expenses in the expense section of the schedule C and use COGS when there is actually an inventory.

Linda, EA

[DMICPA]

Services on the CGS portion

Had a C-Corporation. A group of Doctors. One owner. The Corporation staffed an Emergency room with doctors. These were outside contractors of the Corporation and billed the Corporation based on hours worked staffing the Emergency room. The Corporation billed the hospital.

The hospital paid the Corporation, the corporation paid the doctors. The placement by me was on the CGS because it seemed to be directly related to the revenue which "flowed through" to the various doctors.

IRS came in to audit. The agent told me that I should not put the payments for services by the doctors in the cost of goods sold. Services were to go in the "other deductions' area.

Started doing what the IRS said, never had any other contact.

[S T]

Had similar

IRS does not want to see wages or contract labor on COG unless it is "truly mfg or retail biz having inventory " if a Service Oriented Biz all goes on Sched C lines - as commissions - salaries/wages - or other. Would guess the same for 1065 and 1120S

I have a few small contractors (repairs and renovations) jobs completed in less than 60 days - that have no inventory - and I never use COG - use the categories mentioned above, and then use supplies for their material /supply cost - So far has not been any issue.

Only use COG where there is an inventory factor of any consequence.

Sandy