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Cost of goods sold

Also called COGS

Cost of goods sold, or COGS, is what the inventory you sold cost you, deducted from sales to work out your gross profit for tax purposes.[1]

For a watch dealer, that includes what you paid for each watch and related costs of getting it ready to sell. Good purchase records are what support the figure: the IRS says purchase documents should show who you paid, how much, proof of payment, the date, and what was bought.[2]

Keep a bill of sale and proof of payment for every watch, filed with its records.

Related terms

Read more

ArticleWhat records does a watch dealer have to keep?Compliance guideFederal rules for watch dealers: cash reporting, AML, and tax

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Sources

  1. IRS - Instructions for Schedule C (Form 1040); Profit or Loss From Business (Sole Proprietorship). Part III is COST OF GOODS SOLD; and the instructions provide that IN MOST CASES IF YOU PRODUCE; PURCHASE OR SELL MERCHANDISE IN YOUR BUSINESS YOU MUST KEEP AN INVENTORY AND USE THE ACCRUAL METHOD FOR PURCHASES AND SALES OF MERCHANDISE; and where you must account for inventory YOU MUST GENERALLY VALUE THE INVENTORY EACH YEAR to determine your cost of goods sold in Part III. EXCEPTION FOR SMALL BUSINESS TAXPAYERS: YOU QUALIFY AS A SMALL BUSINESS TAXPAYER IF YOU (a) HAVE AVERAGE ANNUAL GROSS RECEIPTS OF $31 MILLION OR LESS FOR THE 3 PRIOR TAX YEARS (INDEXED FOR INFLATION); AND (b) ARE NOT A TAX SHELTER as defined in section 448(d)(3); if the business has not existed for the whole 3-tax-year period the average is based on the period it has existed. A qualifying small business taxpayer may TREAT INVENTORY AS NON-INCIDENTAL MATERIALS AND SUPPLIES or follow its financial accounting treatment of inventories; and CHANGING YOUR METHOD OF ACCOUNTING FOR INVENTORY requires the prescribed change-of-accounting-method procedure. The practical effect for a watch dealer is that the $31 million test is far above any normal dealer's turnover; so the small business taxpayer exception is available; but WHICH permitted method to elect; and how to value inventory under it; are facts this site does not resolve — retrieved 2026-09-23
  2. IRS - What kind of records should I keep - supporting documents include sales slips; paid bills; invoices; receipts; deposit slips and canceled checks; gross receipts documentation includes cash register tapes; deposit information for cash and credit sales; receipt books and invoices; purchase and expense documents should identify the payee; the amount paid; proof of payment; the date incurred and include a description of the item; acceptable documents include canceled checks or other documents reflecting proof of payment or electronic funds transferred; cash register tape receipts; credit card receipts and statements; and invoices; and the page states that all requirements that apply to hard copy books and records also apply to electronic records — retrieved 2026-09-23