Guide

Business expenses for resellers: how to get from sales to profit

Business expenses are the costs of running your business that you can subtract from your profit. This guide walks through the order the IRS uses, explains the key words in plain English, and points to the other guides on this site for the details.

General information only, not legal or tax advice. I am not a CPA or an attorney. This guide explains what IRS Publication 334 and the tax law say. It does not tell you what you can deduct. The numbers in the example are made up.

The big picture: five steps in order

The IRS has an order for figuring profit. The order matters, because you must find your gross profit before you subtract business expenses.

1. Gross receipts. All the money your sales brought in.
2. Net receipts. Gross receipts minus returns and allowances.
3. Cost of goods sold. What you paid for the goods you actually sold.
4. Gross profit. Net receipts minus cost of goods sold.
5. Business expenses. The other costs of running the business, subtracted from gross profit.

What is left is your profit from the business. That is the number tax is figured on, which is why careful records of every step matter.

Steps 1 and 2: from gross receipts to net receipts

For a business that sells products, the IRS says to find net receipts by subtracting returns and allowances from gross receipts. On Schedule C (Form 1040), gross receipts are line 1, returns and allowances are line 2, and net receipts are line 3.

Returns and allowances include cash or credit refunds you give customers, rebates, and other amounts taken off the real sales price. If you sold a $40 jacket and later refunded the buyer in full, that $40 comes back out.

Publication 334 also lists sales tax collected among the things to check when you figure gross profit. How the tax you collected from customers shows up in your totals is a good question for a CPA, because that money goes to the state and is not extra income for you. See why collecting and paying sales tax matters.

Source: IRS Publication 334, Figuring Gross Profit.

Step 3: cost of goods sold

Cost of goods sold is the cost of the items you sold, not everything you bought. The IRS describes it as the value of your inventory at the start of the year, plus what you bought, minus the value of what is left at the end of the year. Items still on your shelf do not count yet. They count when they sell.

If you make, repair or restore the goods you sell, some of your workshop costs can be part of cost of goods sold too. Read overhead expenses and cost of goods sold. For how cost of goods sold differs from supplies and equipment, read supplies and equipment. A tidy SKU system makes the inventory numbers much easier.

Step 4: gross profit

Gross profit is net receipts minus cost of goods sold. It tells you how much money your products made before the cost of running the business.

A made-up example

These numbers are invented to show the steps. They are not advice or a prediction.

Notice what the $5,000 of purchases did. Only the part that sold ($4,500 after the inventory change) reduced profit this year. The $2,500 still on the shelf waits for next year. Whether this example would work the same on your return, including taxes such as self-employment tax, is a question for a CPA.

Step 5: what is a business expense?

The IRS says you can deduct the costs of operating your business. These are costs you do not have to add to the cost of goods sold or spread over several years, and you can deduct them in the current year. A deduction lowers your taxable profit. It does not cancel your tax bill, and it does not give you money back by itself.

The key test: ordinary and necessary

The main tax law on business expenses is Section 162 of the Internal Revenue Code. It allows a deduction for the “ordinary and necessary” expenses of carrying on a trade or business. Both words must fit:

• Ordinary means common and accepted in your line of work. Reselling businesses commonly pay platform fees, buy packing tape, and print shipping labels.
• Necessary means helpful and appropriate for your business. It does not have to be absolutely required. The IRS says an expense does not need to be indispensable to count as necessary.

A simple way to think about it: would another seller in your business spend this money, and does it help you run the business? If you have to stretch to explain it, ask a CPA. Sources: IRS Publication 334, Business Expenses; 26 U.S.C. 162, Cornell Legal Information Institute.

What the law names as examples

Section 162 lists a few examples of ordinary and necessary expenses:

• Reasonable pay for work that people actually do for your business. “Reasonable” and “actually” both matter.
• Travel costs, including meals and lodging, while you are away from home on business. The law excludes amounts that are lavish or extravagant.
• Rent or other required payments for property you use in the business but do not own.

When a cost is partly personal

If an expense is partly for business and partly personal, separate the two. The IRS says the personal part is generally not deductible. Examples a reseller might meet:

• A phone or internet plan you use for both selling and personal life.
• A car you drive for sourcing trips and for everything else.
• A room in your home used for storage and also as a bedroom.

Write down how you worked out the business share and keep that note with your records. Vehicles have extra rules. See Section 179 explained: vehicles and equipment.

Common kinds of business expenses

Publication 334 has a chapter on business expenses that covers these topics, among others. Which ones apply to you depends on your business:

• Car and truck expenses, using the standard mileage rate or actual costs.
• Depreciation and equipment. Big purchases that last years, including the Section 179 deduction and the small-purchase safe harbor. See supplies and equipment.
• Insurance.
• Interest on business loans.
• Legal and professional fees.
• Rent for space you use in the business.
• Taxes connected to the business, such as property, sales and employment taxes.
• Employees’ pay and benefits.
• Travel and meals, and business use of your home.
• Bad debts, when a customer does not pay.

Everyday reseller costs such as platform fees, postage, and shipping supplies are handled in their own categories on Schedule C. A few common ones are covered in supplies and equipment. Ask your CPA which line fits each cost.

Costs the law does not allow

Section 162 also says some payments are not deductible even if they relate to a business. A few of the plainest:

• Illegal bribes and kickbacks.
• Fines and penalties paid to a government for breaking a law. Real examples for a seller: a late-filing penalty or a fine from a city for operating without a required license. Taxes themselves are a different category.
• Lobbying and political campaign spending.
• The personal part of a mixed personal and business cost.

The law has more exceptions and special rules. They mostly affect large businesses, so this guide leaves them out.

Expenses and the hobby question

Business expenses are for a real business. If the IRS decides your activity is a hobby, expenses are generally not deductible. Read is your reselling a hobby or a business? for what the IRS looks at. Licenses and registrations are listed in the Chicago startup checklist.

Records that protect you

• Keep a receipt, order confirmation or bank record for every expense, with the date, the seller and what it was for.
• Sort expenses into categories as you go: cost of goods sold, supplies, fees, postage, equipment, and so on.
• Keep sales reports and refund records so your gross receipts, returns and allowances can be shown.
• Pay business costs from a separate account when you can. See opening a business bank account.
• Write a short note whenever you split a cost between business and personal use.

Questions for your CPA

• Which of my costs are cost of goods sold and which are regular business expenses?
• How should I record refunds and the sales tax I collect?
• Which of my costs are partly personal, and how should I split them?
• Should I deduct equipment now or spread it over several years?
• What records will I need if the IRS asks about an expense?

I am not a CPA or an attorney

This page is general educational information. It is not legal, tax or accounting advice, and it does not say that any particular cost is deductible for you. Tax rules change each year and depend on your situation, so check with a CPA and the IRS. Flipfiled helps with registrations and filings from information you provide. It does not prepare tax returns.

Sources: IRS Publication 334, Tax Guide for Small Business (Figuring Gross Profit; Business Expenses); 26 U.S.C. 162, Trade or business expenses (Cornell Legal Information Institute). The definitions of net receipts, ordinary, necessary and the partly personal rule are from Publication 334 as the site owner quoted it to me. I could read Section 162 and the chapter headings of Publication 334 myself, but not the full text of the chapters, so confirm the wording on the IRS page. The worked example is invented and the plain-English explanations are mine. Checked Oct 29, 2026.