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Schedule C Part III Lines 33 to 42: Cost of Goods Sold (2025)

Updated October 18, 2026. Quick answer: Part III figures cost of goods sold for a business that deals in merchandise. You add the opening inventory, purchases, labor, materials and other costs on lines 35 to 39, subtract the closing inventory on line 41, and carry the result from line 42 to line 4 of Part I.

Picking the Schedule C business code for your work (2025 chart): Schedule C code for online sellers and Schedule C code for Etsy sellers.

What Part III asks for

The instructions begin: “In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an” income-producing factor, “you must take inventories into account at the beginning and end of your tax year.” The form captions line 4 of Part I as “Cost of goods sold (from line 42)”, so Part III is the worksheet behind that line. It is explained alongside Schedule C lines 2 to 5.

Line 33: valuing inventory

The form asks “Method(s) used to value closing inventory:” with the choices cost, lower of cost or market, and other. The instructions say your “inventories can be valued at cost, the lower of cost or market, or any other method approved by the IRS.” Line 34 asks “Was there any change in determining quantities, costs, or valuations between opening and closing inventory?”

Lines 35 to 41: where each number comes from

The form captions are short: line 35 is “Inventory at beginning of year. If different from last year’s closing inventory, attach explanation”; line 36 is “Purchases less cost of items withdrawn for personal use”; line 37 is “Cost of labor. Do not include any amounts paid to yourself”; line 38 is “Materials and supplies”; and line 39 is “Other costs”. Line 40 is “Add lines 35 through 39” and line 41 is “Inventory at end of year”. Your numbers come from the inventory count and your purchase, payroll and supply records.

For line 35 the instructions add: “If you are changing your method of accounting beginning with 2025, refigure last year’s closing inventory using your new method of accounting and enter the result on line 35.” “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 your section 481(a) adjustment.”

Keeping inventory, or not

Smaller businesses have a choice: “If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income.” The definition is: 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)).” For a business that treats inventory as supplies, “you deduct the amounts paid to acquire or produce the inventoriable items (treated as materials and supplies) in the year in which they are first used or consumed in your operations.”

To change methods: “If you want to change your method of accounting for inventory, file Form 3115.” The instructions also warn “Certain direct and indirect expenses may have to be capitalized or included in inventory.” and point to “See Pub. 538 for additional information.”

Where it goes next

Line 42 is captioned “Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4”. Line 4 then feeds gross profit on line 5, and the rest of the schedule is covered on the Schedule C (Form 1040) page. Expenses that are not part of cost of goods sold go in Part II, starting at Schedule C lines 8 and 9.

Computed illustration, not an IRS example: take lines 35 to 39 as $2,000 and $6,000 and $1,000 and $500 and $500 added together; line 40 is then computed as $10,000. If line 41 is $3,000 then line 42 is computed as $10,000 minus $3,000 which is $7,000.

Edition and line numbers

This page reads the 2025 Schedule C (Form 1040) and its 2025 instructions, the current files irs.gov served on 2026-10-18. They are byte-identical to the archived copies and they are the files for the tax year 2025 return, filed in 2026. The schedule says “Attach to Form 1040, 1040-SR, 1040-SS, 1040-NR, or 1041”; “partnerships must generally file Form 1065.” Schedule C has its own instructions booklet, titled “Instructions for Schedule C” (Form 1040). Check the tax year printed on the schedule you are filling in and use the line numbers on that year’s schedule, because a different year’s schedule can number or word its lines differently.

Common mistakes

  • Including your own pay in labor. Line 37 says “Cost of labor. Do not include any amounts paid to yourself”
  • Changing the opening inventory without a note. Line 35 says “If different from last year’s closing inventory, attach explanation”
  • Changing inventory methods without the form. The instructions say “If you want to change your method of accounting for inventory, file Form 3115.”

Related: Schedule C (Form 1040), Form 1040, and Form 1040 line by line.

Sources

Read from the IRS documents linked above on October 18, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.

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