Welcome to our simple guide on Form 1125-A, the form used to report your cost of goods sold (COGS) for your business. If you’re new to filing taxes or unfamiliar with tax forms, don’t worry - we’ll break it down for you in easy-to-understand terms so you can approach this task with confidence. Let’s begin!
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What is Form 1125-A?
Form 1125-A is an IRS tax form used by businesses to report their cost of goods sold (otherwise known as “COGS”). This information is used in conjunction with the parent filing to calculate the business’s gross profit for the year.
Do I Need to File Form 1125-A?
Partnerships, and S corporations most commonly file the 1125-A form alongside either Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B.
Form 1125-A is typically only required for businesses that have an inventory as it is concerned with COGS.
If you are a sole proprietor filing under a “pass-through” tax structure, you may need to instead file a Schedule C as an additional form to your personal return. See our Schedule C Guide here for more details if this better represents your maker business structure.
Cost of Goods Sold: A Quick Primer
Before we dive into the specifics of Form 1125-A, let’s quickly define what cost of goods sold actually means. COGS is the total cost required to produce (or acquire) your products that were sold during a certain period of time.
This includes all direct costs associated with production, such as materials and labor. It does not include indirect expenses like marketing or rent.
See our guide here on how to calculate COGS for an in-depth look at this tally.
How to fill out Form 1125-A
Form 1125-A is a relatively straightforward one-pager form. If you already have your calculations ready to go from your favorite inventory software, you should be able to complete this within a coffee break.
The first step is to download the latest version of Form 1125-A from the official IRS site here.
As you’ll see there are 9 questions, with a couple of sub-tally fields for cross checking.
Let’s take a look in detail at these now.
1 Inventory at beginning of year
This is the value of inventory you held at the beginning of year. See our guide here on how to calculate your beginning of year inventory.
2 Purchases
This is a tally of the cost of all inventory purchases made during this tax year.
3 Cost of labor
This is the labor cost associated with producing your goods, including wages and salaries for employees involved in production.
4 Additional section 263A costs (attach schedule)
Section 263A deals with the capitalization of certain costs related to property produced. If this applies to your business, you will need to attach a schedule showing these costs.
5 Other costs (attach schedule)
This line item is for any additional costs that are not included in the previous fields, such as freight or storage expenses. Be sure to attach a schedule showing these costs.
6 Total Add lines 1 through 5
This is fairly self explanatory, simply add up the following lines and report the total here.
7 Inventory at end of year
The value of inventory you held at the end of the year.
8 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.
9. Methods for Valuing Closing Inventory
9a Check all methods used for valuing closing inventory:
(i) Cost (ii) Lower of cost or market (iii) Other (Specify method used and attach explanation.)
When it comes to valuing your closing inventory, Form 1125-A provides a few choices, and you should check all the methods that your business utilizes.
Cost: This is the most straightforward method. Here, you essentially value your closing inventory based on the cost to produce or purchase your goods. This includes direct costs such as raw materials and labor.
Lower of cost or market: This method is slightly more complex. It involves valuing your inventory at the lower of either the cost to produce or purchase the goods or the market price of the goods. This approach is typically used when market conditions indicate a decrease in the value of your inventory.
Other (Specify method used and attach explanation): If your business uses a different method for valuing inventory not mentioned above, you would select this option. Be sure to specify the method used and attach an explanation. Common “other” methods might include the ‘Retail Inventory Method’ or ‘Last-In, First-Out (LIFO)’ method.
Remember, the method you use to value your inventory can significantly impact the calculation of your cost of goods sold and, hence, your business’s taxable income. Always ensure the method you use is consistent with generally accepted accounting principles (GAAP) and is used consistently from year to year.
See our guide to inventory valuation methods here:FIFO, LIFO or Average Cost: Which Inventory Valuation Method is Best?
9b Check if there was a writedown of subnormal goods
If your business had any subnormal goods (i.e. damaged or obsolete inventory), you can deduct the cost of these goods from your closing inventory. Be sure to check this box and attach an explanation if applicable.
9c Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970):
If your business uses the LIFO method for valuing inventory, you will need to file Form 970 alongside Form 1125-A. The LIFO method allows businesses to value their inventory at the most recent cost of goods purchased or produced, rather than using the cost of the oldest goods.
9d If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed under LIFO method.
If your business uses the LIFO method, you will need to enter the value of your closing inventory as calculated using this method on this line.
9e If property is produced or acquired for resale, do the rules of section 263A apply to the entity?
Section 263A, also known as the Uniform Capitalization Rules (UNICAP), applies to businesses that produce or acquire property for resale. If this applies to your business, select ‘Yes’ and attach a schedule detailing the costs subject to UNICAP.
9f Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If “Yes,” attach explanation
If there were any changes made to the method used for valuing inventory or determining quantities and costs between the opening and closing inventory, be sure to explain these changes and attach an explanation.
When do I need to file Form 1125-A?
Form 1125-A is included as part of your business tax return, which is typically due on March 15th for partnerships and S corporations, and April 15th for sole proprietors (the exact date can and does change from year to year).
Tips for filling out Form 1125-A
- Be sure to include all relevant costs related to producing your goods or services, such as materials, labor, and overhead expenses.
- Double-check your math and make sure you’re using the correct formulas for calculating COGS.
- If you’re unsure about a certain expense, it’s always best to consult with a tax professional or do some research to ensure you’re reporting the right amounts. Better to be safe than sorry with the tax man!
Using software to complete Form 1125-A
If you’re a small business owner, your time is precious. You don’t have hours to spend filling out tedious forms like Form 1125-A. Thankfully there are several inventory management software options that can make this process quicker and simpler.
These software solutions are designed to track your inventory levels, purchases, and production costs automatically throughout the year. This means when it comes time to fill out Form 1125-A, all the information is at your fingertips and the form can be completed in a fraction of the time.
Introducing Craftybase, an excellent choice for managing your inventory. This intuitive COGS software not only tracks your inventory levels, COGS, starting and ending inventory, purchases, and production costs, but it also generates and populates IRS forms like Form 1125-A, saving you significant time and effort. Craftybase’s robust features and user-friendly interface make it a reliable tool for small businesses looking to streamline their inventory process and tax filings.
But don’t just take our word for it! Craftybase offers a free 14-day trial for you to test out all its features and see how it can simplify your inventory management. Click here to start your free trial today and see the difference it can make in your business operations!
In conclusion
Filling out Form 1125-A may seem intimidating at first, but with a little bit of knowledge and organization, you can easily report your cost of goods sold accurately. Remember to keep good records throughout the year and double-check your work, and you’ll be on your way to filing a successful tax return. And if you ever have any questions or concerns, don’t hesitate to seek guidance from a tax professional. Happy filing!
