Schedule C Part III for Makers 2025: Cost of Goods Sold, From Line 35 to Line 4

§1One job, one tax year, one line

The job is marketplace seller — specifically, the seller who makes the thing being sold. The year is 2025, the current final Schedule C on file for this article. And the line is line 42: cost of goods sold.

Line 42 looks like the end of a side calculation. It is not. Part III adds a maker’s inventory and production costs, removes ending inventory, and sends the result into Part I on line 4.

§2Where the money lands: sales in Part I, production cost in Part III

A maker has two different streams on the same form, and Schedule C keeps them in different places.

The sales stream is in Part I. Line 1 is gross receipts or sales. Line 2 is sales returns and allowances. Line 3 subtracts line 2 from line 1. Then line 4 waits for cost of goods sold from line 42. Line 5 subtracts line 4 from line 3, producing gross profit before line 6 and the rest of Part I continue.

The production stream is in Part III. The instructions say Part III is completed when the production, purchase, or sale of merchandise is an income-producing factor, and that inventories are taken into account at the beginning and end of the year. Publication 334 restates the same chain for businesses that sell products: net receipts on line 3 are line 1 minus line 2, and gross profit is line 3 minus line 4.

That split is the whole article: the form builds cost of goods sold in Part III, carries it to line 4, and only then computes gross profit.

§3The walk: lines 35 through 42, as printed

Read Part III in the order the form prints it.

Line 35 — inventory at the beginning of the year. Publication 334 describes beginning inventory for a manufacturer as including raw materials, work in process, finished goods, and materials and supplies used in manufacturing. This is the starting stock the year opens with — not a pile of receipts, but the inventory figure the form asks for at the start of the period.

Line 36 — purchases less cost of items withdrawn for personal use. For a merchant, the instructions describe purchases as merchandise bought for sale. For a manufacturer, Publication 334 describes purchases as the cost of raw materials or parts purchased for manufacture into a finished product. The personal-use piece matters: items withdrawn for personal use are taken out of purchases. A cost that leaves the business for personal use does not continue into cost of goods sold through line 36.

Line 37 — cost of labor. The form’s labor line is not a place for amounts paid to yourself. Publication 334 states that line 37 is cost of labor, not amounts paid to yourself, and that labor is a cost-of-goods-sold element mainly in manufacturing and mining. In a one-person maker shop, this line can be zero even when the owner worked all year; the owner’s own work is not entered as labor cost on line 37.

Line 38 — materials and supplies. This is the line the maker trap turns on, so read the limit with it. Publication 334 says materials and supplies used in manufacturing goods are charged to cost of goods sold on line 38. The same discussion separates out materials and supplies not used in manufacturing: those are deferred and deducted as a business expense when used, rather than charged to line 38.

Line 39 — other costs. Publication 334 places the remaining production costs here: containers that are part of the product, freight-in, and manufacturing overhead are the examples it gives. This is still Part III territory — costs tied to producing the goods — not a miscellaneous bucket for every business purchase.

Line 40 — add lines 35 through 39. This is the form’s subtotal: beginning inventory, plus purchases, plus labor, plus materials and supplies, plus other costs.

Line 41 — inventory at the end of the year. Ending inventory is the mirror of line 35. It is the inventory still counted at year-end, after the year’s production and sales. Because line 42 subtracts line 41, the cost of items still in inventory at year-end is not left inside this year’s cost of goods sold figure.

Line 42 — cost of goods sold. Line 42 subtracts line 41 from line 40. The result is entered on line 42 and on line 4. That second entry is the point of the section: Part III ends by feeding Part I.

§4The maker trap: line 38 is not “all supplies,” and line 22 says so

The trap is a word: “supplies.” A maker buys things that sound alike — materials that become part of the product, and supplies that merely help the shop run. Schedule C does not treat the word as one category.

Line 38 is limited by its subject. It takes materials and supplies used in manufacturing goods. The form then gives the other category its own caption in Part II: line 22 is “Supplies (not included in Part III).” Read that caption literally. It does two jobs at once. It gives non-Part-III supplies a line, and it states the boundary in the caption itself: not included in Part III.

That is why the same dollar cannot be placed in both systems. If a material belongs to the manufacturing side described for line 38, it is part of the Part III build. If a supply is not included in Part III, line 22 is the caption that describes it, and the instructions describe those supplies as deducted generally only to the extent consumed or used in the business during the year. The form’s own wording blocks the double count: line 22 supplies are, by caption, the ones not in Part III.

Notice what this article is not doing. It is not sorting a particular purchase for a particular shop. It is reading the boundary the form prints: manufacturing materials and supplies are handled through the Part III mechanics; supplies outside Part III are not added there too.

§5Worked example: one small maker, one year

One worked example, with numbers used only in this article. The seller is hypothetical: a sole proprietor who sells handmade goods through a marketplace and keeps an inventory. The sales figures are stated inputs for this example; the Part III figures are the point of the walk.

Gross receipts on line 1 are $39,000. Returns and allowances on line 2 are $1,000. Line 3 is therefore $39,000 minus $1,000, which is $38,000.

Now Part III. Beginning inventory on line 35 is $4,000. Purchases on line 36 are $7,500, after removing anything withdrawn for personal use. Cost of labor on line 37 is $1,200 — production labor paid to someone other than the owner; the owner’s own pay is not entered here. Materials and supplies used in manufacturing on line 38 are $2,300. Other costs on line 39 are $500.

Line 40 adds lines 35 through 39: $4,000 + $7,500 + $1,200 + $2,300 + $500 = $15,500.

Ending inventory on line 41 is $3,000. Line 42 subtracts line 41 from line 40: $15,500 − $3,000 = $12,500. That $12,500 is cost of goods sold. It is entered on line 42 and again on line 4.

Back in Part I, line 5 subtracts line 4 from line 3: $38,000 − $12,500 = $25,500. That is gross profit for this example, before any other Part I or Part II items are considered.

The example keeps each production cost in one place. Nothing in the Part III total is also described as a line 22 supply, because line 22 is captioned for supplies not included in Part III.

§6The Fork: keep an inventory, or use the small-business materials posture

Part III has a fork, and the instructions print both sides.

On one side is the inventory method this article just walked: beginning inventory on line 35, additions through lines 36–39, ending inventory on line 41, and cost of goods sold on line 42. The instructions connect that side to annual inventory accounting: if a taxpayer keeps an inventory, it must generally be valued each year for Part III.

On the other side is the exception the instructions print for a small business taxpayer. “Small business taxpayer” is defined there as a taxpayer that meets the gross receipts test — average annual gross receipts of $31 million or less for the three prior tax years — and is not a tax shelter under the cited code section. A small business taxpayer may choose not to keep an inventory if its accounting method treats inventory as nonincidental materials and supplies, or if the method conforms to its financial-accounting treatment. Under the nonincidental materials and supplies treatment the instructions describe, inventoriable items are deducted in the year they are first used or consumed.

Read the fork carefully. The exception changes how inventoriable items are accounted for. It does not repeal the line 38/line 22 boundary for supplies outside that treatment, and it does not turn Part III into a strategy page. This article does not pick a winner. It leaves the two printed postures where the instructions leave them: an inventory kept and run through lines 35–42, or a small-business method that treats inventory as nonincidental materials and supplies under the definition and timing the instructions print.

One more printed point belongs beside the fork: changing an inventory accounting method requires Form 3115. The method question is not a casual label swap inside Part III; it has its own form in the IRS materials.

§7What this form does not cover

Part III does not decide whether an activity is a business. The Schedule C instructions route nonbusiness income away from Schedule C, and that classification question sits before the maker walk in this article even starts.

Part III also does not cover state taxes, and it does not settle sales-tax treatment. The federal form has specific line instructions for certain sales taxes collected from buyers, but state and local sales-tax obligations themselves are outside this article and outside this site’s stated coverage.

It does not price your products, value a disputed inventory item, or work through inventory-method changes and capitalization rules beyond the small-business material read above. The instructions point to other IRS materials for capitalization and method-change mechanics; those are not read line by line here.

Software numbers vs ask-a-human numbers. Software can carry the line 40 addition, the line 42 subtraction, and the entry of line 42 onto line 4. Take these judgments to a human: whether a cost belongs in the manufacturing build or outside Part III, whether an inventory is being kept, and whether the small-business materials posture fits a specific set of books.

That is Part III as the 2025 form prints it: beginning inventory, purchases, labor, manufacturing materials and supplies, and other costs on lines 35–39; a subtotal on line 40; ending inventory removed on line 41; and cost of goods sold on line 42, carried to line 4 so Part I can compute gross profit.

Next in this hub: Seller Article 3 — business, hobby, or personal items. Article 16