Inbound shipping is part of Cost of Goods Sold; outbound shipping is not. So the short answer to whether COGS includes shipping is: it depends which direction the freight is moving. Freight paid to get inventory into your warehouse (freight-in) is capitalized into the cost of that inventory and flows into COGS when the goods sell. Freight paid to deliver finished orders to customers (freight-out) is a selling expense that sits in operating costs, separate from COGS.
Why Freight-In Is a COGS Cost
The IRS is explicit on inbound freight. Freight-in, express-in, and cartage-in on raw materials, production supplies, and merchandise purchased for resale are all part of cost of goods sold.1Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business The Treasury regulations give the mechanical version of the same rule: when you purchase merchandise, your cost equals the invoice price minus any trade discounts, plus transportation or other necessary charges you incur to take possession of the goods.2eCFR. 26 CFR 1.471-3 – Inventories at Cost
In practice that means you do not expense the freight bill when you pay it. You add it to the value of the inventory on your balance sheet, where it sits as an asset until the goods sell. Only then does the full loaded cost, freight and all, move to the income statement as COGS. Expensing freight-in on receipt understates your inventory asset and distorts gross profit for the period.
Why Freight-Out Stays Out of COGS
Outbound shipping is incurred after the product is already in saleable condition, so it has nothing to do with acquiring or producing inventory. It is a selling and distribution expense, recorded as an operating cost.
The logic is simple. Freight-in is what it costs to get the product to you. Freight-out is what it costs to complete a sale after the product is yours. Only the first shapes what the product cost you. Rolling freight-out into COGS deflates your gross profit margin and makes your products look more expensive to acquire than they are. Net income is unaffected because the total expense is the same either way, but the gross margin percentage that lenders and analysts read as a signal of pricing power and sourcing efficiency becomes unreliable.
Some e-commerce sellers report freight-out inside a broader “cost of revenue” line rather than under general selling expenses. That is a presentation choice, not a reclassification into COGS, and gross margin should still reflect product costs alone.
FOB Terms Decide Who Owns the Freight
Purchase contracts settle both questions at once: who pays the shipping, and when title to the goods transfers. Free on Board terms are the shorthand.
- FOB Shipping Point. The buyer takes ownership the moment goods leave the seller’s dock. The buyer pays the freight and capitalizes it into inventory cost. Goods in transit already belong to the buyer, so they belong on the buyer’s balance sheet before they arrive.3Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods
- FOB Destination. The seller keeps title until the goods arrive. The seller bears the freight cost as a delivery expense on its own books, and the buyer records inventory only once delivery is complete.
The distinction bites hardest at period end. If a large shipment is in transit on December 31 under FOB Shipping Point terms, that inventory is yours even though it hasn’t arrived, and both the goods and the associated freight-in should be included in the year-end count. IRS Publication 538 states directly that purchased merchandise should be included in inventory if title has passed to you, even without physical possession.3Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods Under FOB Destination, the same in-transit goods still belong to the seller and you record nothing.
Splitting One Freight Bill Across Multiple Products
A single inbound shipment rarely holds just one SKU, and the freight invoice usually arrives as one number. To capitalize it correctly you need a reasonable method to spread that charge across the units received. Three approaches are common: allocation by weight, by volume, or by relative purchase value.
Weight-based allocation fits most ground freight, where heavier items genuinely drive higher shipping charges. Value-based allocation makes more sense when the goods are similar in size and weight but vary widely in price. Whichever method you pick, use it consistently. Switching between periods without a real reason undermines the comparability of your financial statements and invites audit questions.
It is tempting to skip allocation on small shipments, but the errors compound. Dozens of shipments a month with mixed products and unallocated freight will steadily distort the reported cost of individual product lines, and you lose the ability to tell which products are actually profitable.
When You Charge the Customer for Shipping
Charging a shipping fee at checkout raises a separate accounting question from where the cost lands. Under ASC 606, sellers can elect a practical expedient that treats shipping and handling occurring after the customer takes control of the goods as a fulfillment cost rather than a separate performance obligation. Under that election, the fee charged to the customer becomes part of the transaction price, and the related shipping cost is recognized as a fulfillment expense.
Without the election, shipping after control transfers can be a separate performance obligation, with its revenue and cost recognized on their own. Either way, the point for your COGS question is unchanged: outbound shipping remains distinct from the freight-in that gets capitalized into inventory. Most small and mid-sized sellers elect the expedient because it simplifies reporting.
What Misclassification Does to Your Numbers
Putting shipping in the wrong bucket is not just a bookkeeping tidiness issue. It actively misleads anyone reading the statements, including you.
Expense freight-in immediately instead of capitalizing it, and two things happen at once. Your inventory asset is too low today, and your current-period expenses are too high. Then, when those goods eventually sell, COGS is too low because less cost was loaded into the inventory, and gross profit in that later period looks artificially strong. The result is a timing mismatch that scrambles profitability trends between periods.
Dump freight-out into COGS instead of treating it as a selling expense, and net income doesn’t change (the total expense is the same), but the gross margin percentage drops while operating expenses look artificially lean. A business showing a 40% gross margin with high delivery costs tells a very different sourcing and pricing story than one showing a 32% gross margin with low operating expenses, even when the bottom lines match.
Publication 538 reinforces the timing dimension for tax purposes: shipping costs should be matched to the income they help generate. If you report a sale in one year but don’t ship until the next, the shipping cost belongs to the year of the sale, not the year the goods physically move.3Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods Businesses that report a COGS deduction also complete Form 1125-A, and the number on that form flows directly into taxable income, so a category error affects the tax return as well as the financial statements.4Internal Revenue Service. Form 1125-A – Cost of Goods Sold
An Extra Layer for Larger Businesses: Section 263A
Beyond the basic freight-in rule, larger businesses face the Uniform Capitalization rules under Section 263A of the Internal Revenue Code. Businesses that produce property or acquire it for resale must capitalize both the direct costs and a proper share of indirect costs allocable to inventory.5Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
UNICAP sweeps in more than freight. Under the simplified resale method, capitalized indirect costs include off-site storage and warehousing, purchasing costs, handling costs such as processing and repackaging, and a share of general and administrative overhead.4Internal Revenue Service. Form 1125-A – Cost of Goods Sold Those costs fold into inventory value and reach COGS only when the goods sell, the same pattern as freight-in.
The base gross receipts threshold for UNICAP is $25 million averaged over the prior three tax years, adjusted for inflation.5Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses Businesses below the threshold can use the simplified inventory method under Section 471(c) and avoid the full UNICAP calculation. Businesses that grow past it may have to start capitalizing costs they were previously expensing, which can shift taxable income noticeably in the year of the change.