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Form   1125-A                                             Cost of Goods Sold
(Rev. October 2016)                                                                                                               OMB No. 1545-0123
                                          ▶
Department of the Treasury                  Attach to Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B. 
Internal Revenue Service        ▶ Information about Form 1125-A and its instructions is at www.irs.gov/form1125a.  
Name                                                                                                                Employer identification number

1      Inventory at beginning of year   .  . . . . .      .     . . . . . .      . . .     .   . . . .          1
2      Purchases  .         . . . . .  .   . . . . .      .     . . . . . .      . . .     .   . . . .          2
3      Cost of labor  .       . . . .  .   . . . . .      .     . . . . . .      . . .     .   . . . .          3
4      Additional section 263A costs (attach schedule)  . .     . . . . . .      . . .     .   . . . .          4
5      Other costs (attach schedule)   .   . . . . .      .     . . . . . .      . . .     .   . . . .          5
6      Total. Add lines 1 through 5 .  .   . . . . .      .     . . . . . .      . . .     .   . . . .          6
7      Inventory at end of year  .  .  .   . . . . .      .     . . . . . .      . . .     .   . . . .          7
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. See instructions  . . . . . . .      . . .     .   . . . .          8
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.) ▶
b      Check if there was a writedown of subnormal goods        . . . . . .      . . .     .   . . . .   .      . . .        . .  . .    ▶
c      Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970)   . .        . .  . .    ▶
d      If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed 
       under LIFO .         . . . . .  .   . . . . .      .     . . . . . .      . . .     .   . . . .          9d
e      If property is produced or acquired for resale, do the rules of section 263A apply to the entity? See instructions  . .    Yes     No
f      Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If “Yes,” 
       attach explanation       . . .  .   . . . . .      .     . . . . . .      . . .     .   . . . .   .      . . .        .    Yes     No

Section references are to the Internal           Under this accounting method, inventory           ending on or after December 31, 2000, has 
Revenue Code unless otherwise noted.             costs for raw materials purchased for use         average annual gross receipts of $10 
                                                 in producing finished goods and                   million or less for the 3 prior tax years, (b) 
General Instructions                             merchandise purchased for resale are              whose principal business activity is not an 
                                                 deductible in the year the finished goods or      ineligible activity, and (c) whose business is 
Purpose of Form                                  merchandise are sold (but not before the          not a tax shelter (as defined in section 448
Use Form 1125-A to calculate and deduct          year you paid for the raw materials or            (d)(3)). See Rev. Proc. 2002-28, 2002-18    
cost of goods sold for certain entities.         merchandise, if you are also using the cash       I.R.B. 815.
Who Must File                                    method).                                          Uniform capitalization rules. The uniform 
Filers of Form 1120, 1120-C, 1120-F,             If you account for inventoriable items in         capitalization rules of section 263A 
1120S, 1065, or 1065-B, must complete            the same manner as materials and supplies         generally require you to capitalize, or 
and attach Form 1125-A if the applicable         that are not incidental, you can currently        include in inventory, certain costs incurred 
entity reports a deduction for cost of goods     deduct expenditures for direct labor and all      in connection with the following.
sold.                                            indirect costs that would otherwise be            • The production of real property and 
                                                 included in inventory costs. See the              tangible personal property held in inventory 
Inventories                                      instructions for lines 2 and 7.                   or held for sale in the ordinary course of 
Generally, inventories are required at the       For additional guidance on this method            business.
beginning and end of each tax year if the        of accounting, see Pub. 538, Accounting           • Real property or personal property 
production, purchase, or sale of                 Periods and Methods. For guidance on              (tangible and intangible) acquired for resale.
merchandise is an income-producing               adopting or changing to this method of            • The production of real property and 
factor. See Regulations section 1.471-1. If      accounting, see Form 3115, Application for        tangible personal property by a corporation 
inventories are required, you generally          Change in Accounting Method, and its              for use in its trade or business or in an 
must use an accrual method of accounting         instructions.                                     activity engaged in for profit.
for sales and purchases of inventory items.      Qualifying taxpayer. A qualifying                   See the discussion on section 263A 
Exception for certain taxpayers. If you          taxpayer is a taxpayer that, (a) for each         uniform capitalization rules in the 
are a qualifying taxpayer or a qualifying        prior tax year ending after December 16,          instructions for your tax return before 
small business taxpayer (defined below),         1998, has average annual gross receipts of        completing Form 1125-A. Also see 
you can adopt or change your accounting          $1 million or less for the 3 prior tax years,     Regulations sections 1.263A-1 through 
method to account for inventoriable items        and (b) its business is not a tax shelter (as     1.263A-3. See Regulations section 
in the same manner as materials and              defined in section 448(d)(3)). See Rev.           1.263A-4 for rules for property produced in 
supplies that are not incidental.                Proc. 2001-10, 2001-2 I.R.B. 272.                 a farming business.
                                                 Qualifying small business taxpayer. A 
                                                 qualifying small business taxpayer is a 
                                                 taxpayer that, (a) for each prior tax year

For Paperwork Reduction Act Notice, see instructions.                              Cat. No. 55988R                           Form 1125-A (Rev. 10-2016)

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Form 1125-A (Rev. 10-2016) Page 2
Specific Instructions Per-unit retain allocations. A cooperative Filers that use erroneous valuation
is allowed to deduct from its taxable methods must change to a method
Line 1. Inventory at Beginning of income amounts paid during the payment permitted for federal income tax purposes.
Year period for the tax year as per-unit retain Use Form 3115 to make this change.
If you are changing your method of allocations to the extent paid in money, For more information on inventory
accounting for the current tax year, you qualified per-unit retain certificates, or valuation methods, see Pub. 538. For more
must refigure last year's closing inventory other property with respect to marketing information on changes in the method of
using the new method of accounting. Enter occurring during the tax year. A per-unit accounting for inventory, see Form 3115
the result on line 1. If there is a difference retain allocation is any allocation from a and the Instructions for Form 3115.
between last year's closing inventory and cooperative to a patron for products Line 9a. Method of valuing closing
the refigured amount, attach an marketed for him without reference to the inventory. On line 9a, check the method(s)
explanation and take it into account when cooperative net earnings. A qualified per- used for valuing inventories. Under lower of
figuring any section 481(a) adjustment. unit retain certificate is any per-unit retain cost or market, the term “market” (for
certificate that the distributee has agreed
Line 2. Purchases to take into account at its stated dollar normal goods) means the current bid price
If you account for inventoriable items in the amount. prevailing on the inventory valuation date
for the particular merchandise in the
same manner as materials and supplies Nonqualified per-unit retain certificates volume usually purchased by the filer. For a
that are not incidental, enter amounts paid redeemed this year. Include the amount manufacturer, market applies to the basic
for all raw materials and merchandise paid in money or other property (except elements of cost—raw materials, labor, and
during the tax year on line 2. The amount amounts already included as per-unit retain burden. If section 263A applies, the basic
you can deduct for the tax year is figured certificates) to patrons to redeem elements of cost must reflect the current
on line 8. nonqualified per-unit retain certificates. No bid price of all direct costs and all indirect
Reduce purchases by items withdrawn deduction is allowed at the time of costs properly allocable to goods on hand
for personal use. For a partnership, the issuance for a nonqualified per-unit retain at the inventory date.
cost of these items should be shown on certificate. However, the cooperative may Inventory may be valued below cost
Schedule K and Schedule K-1 as take a deduction in the year the certificate when the merchandise is unsalable at
distributions to partners. is redeemed, subject to the stated dollar normal prices or unusable in the normal
amount of the certificate. See section 1383.
Line 4. Additional Section 263A Also see the instructions for line 29h of way because the goods are subnormal due
Costs Form 1120-C, U.S. Income Tax Return for to damage, imperfections, shopwear,
If you elected a simplified method of Cooperative Associations, for a special rule change of style, odd or broken lots, or
accounting, enter on line 4 the balance of for figuring the cooperative's tax in the year other similar causes, including second-
section 263A costs paid or incurred during of redemption of a nonqualified per-unit hand goods taken in exchange. The goods
the tax year not includible on lines 2, 3, and retain certificate. may be valued at the bona fide selling
price, minus the direct cost of disposition
5. Line 7. Inventory at End of Year (but not less than scrap value). Bona fide
If you elected the simplified production See Regulations sections 1.263A-1 through selling price means actual offering of
method, additional section 263A costs are 1.263A-3 for details on figuring the amount goods during a period ending not later than
generally those costs, other than interest, of additional section 263A costs to be 30 days after inventory date.
that were not capitalized under your included in ending inventory. If you account Lines 9c and 9d. LIFO method. If this is
method of accounting immediately prior to for inventoriable items in the same manner the first year the Last-in, First-out (LIFO)
the effective date of section 263A, but are as materials and supplies that are not inventory method was either adopted or
now required to be capitalized under incidental, enter on line 7 the portion of extended to inventory goods not previously
section 263A. For details, see Regulations your raw materials and merchandise valued under the LIFO method provided in
section 1.263A-2(b). purchased for resale that was included in section 472, attach Form 970, Application
If you elected the simplified resale the total on line 6 but was not sold during To Use LIFO Inventory Method, or a
method, additional section 263A costs are the year. statement with the information required by
generally those costs incurred with respect Form 970. Check the LIFO box on line 9c.
to the following categories. Line 8. Cost of Goods Sold On line 9d, enter the amount of total
• Off-site storage or warehousing. Enter the amount from line 8 on your tax closing inventories computed under
return as follows. Filers of Form 1120, section 472. Estimates are acceptable.
• Purchasing. 1120-C, 1120S, 1065, and 1065-B, enter If you changed or extended your
• Handling, such as processing, cost of goods sold on page 1, line 2. Filers inventory method to LIFO and had to write
assembling, repackaging, and transporting. of Form 1120-F, enter cost of goods sold up the opening inventory to cost in the year
• General and administrative costs (mixed on Section II, line 2. of election, report the effect of the write-up
service costs). Lines 9a Through 9f. Inventory as other income, on your applicable return,
proportionately over a 3-year period that
Line 5. Other Costs Valuation Methods begins with the year of the LIFO election.
Enter on line 5 any costs paid or incurred Inventories can be valued at:
during the tax year not entered on lines 2 • Cost,
through 4. Attach a statement listing details
of the costs. • Cost or market value (whichever is lower),
or
Special Rules for Cooperatives • Any other method approved by the IRS
Cooperatives are allowed to deduct certain that conforms to the requirements of the
per-unit retain allocations. Include these applicable regulations cited below.
costs on line 5. Attach a statement listing However, if you are using the cash
details of per-unit retain allocations paid in: method of accounting, you are required to
• Qualified per-unit retain certificates, use cost.
• Money or other property (except
nonqualified per-unit certificates), and
• Nonqualified per-unit retain certificates
redeemed this year.

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Form 1125-A (Rev. 10-2016) Page 3
Note: Entities using the LIFO method that information. We need it to ensure that you The time needed to complete and file
make an S corporation election or transfer are complying with these laws and to allow this form will vary depending on individual
LIFO inventory to an S corporation in a us to figure and collect the right amount of circumstances. The estimated burden for
nonrecognition transaction may be subject tax. business taxpayers filing this form is
to an additional tax attributable to the LIFO You are not required to provide the approved under OMB control number
recapture amount. See the instructions for information requested on a form that is 1545-0123 and is included in the estimates
Form 1120, Schedule J, line 11. subject to the Paperwork Reduction Act shown in the instructions for their business
Line 9e. If property is produced or unless the form displays a valid OMB income tax return.
acquired for resale and the rules of section control number. Books or records relating If you have comments concerning the
263A apply to the corporation, cooperative, to a form or its instructions must be accuracy of these time estimates or
partnership, or other applicable entity, retained as long as their contents may suggestions for making this form simpler,
check the “Yes” box on line 9e. become material in the administration of we would be happy to hear from you. See
any Internal Revenue law. Generally, tax the instructions for the tax return with
Paperwork Reduction Act Notice. We returns and return information are which this form is filed.
ask for the information on this form to carry confidential, as required by section 6103.
out the Internal Revenue laws of the United
States. You are required to give us the

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