Tax Deductions for Resellers: COGS, Home Office, and QBI

Tax deductions for resellers run through Schedule C, and the ones that move the needle are Cost of Goods Sold, platform and payment fees, shipping and packaging, a home office, vehicle mileage, software and equipment, half of your self-employment tax, and the 23% qualified business income deduction now permanent under the One, Big, Beautiful Bill Act.¹ Everything else on your return builds on those.

Cost of Goods Sold

For almost every reseller, COGS is the largest single deduction, and it gets its own space on Schedule C in Part III rather than sitting with ordinary expenses. The formula is beginning inventory, plus purchases during the year, minus ending inventory. The result comes off your gross receipts before anything else touches the return.

“Purchases” covers more than what you paid the supplier or thrift store. It includes every cost required to get an item into sellable condition: inbound shipping to your storage location, cleaning supplies used on the item, minor repair costs, and authentication fees for things like handbags or sneakers. Those costs get folded into inventory value rather than deducted separately. The Schedule C instructions state that if you acquire property for resale, you generally must capitalize direct costs and allocable indirect costs into inventory.²

You need to value beginning and ending inventory using the same method each year. Two approaches fit most resellers. First-In, First-Out assumes the oldest inventory sells first. Specific identification tracks the exact cost of each individual item and works best for unique or high-value goods, because you can match a sold item’s precise cost to its revenue. Whichever you pick, accurate inventory records aren’t optional. Without them, the whole COGS calculation falls apart in an audit.

Platform Fees and Payment Processing

Commissions and final value fees charged by eBay, Amazon, Poshmark, Mercari, Etsy, and similar marketplaces are deductible. They belong in Part II of Schedule C on the commissions and fees line, not in COGS, because they’re triggered by a sale rather than by acquiring inventory.

Payment processing charges from PayPal, Stripe, or marketplace checkout systems are a separate deductible expense. Monthly subscription fees for premium seller accounts and promoted listing charges land in the same category. Platform fee structures change often and the amounts add up, so downloading each platform’s annual seller fee summary at year-end is the cleanest way to capture everything.

Shipping and Packaging

Outbound shipping is fully deductible. That covers postage labels from USPS, UPS, FedEx, or any other carrier, plus delivery confirmation and insurance charges. If you offer “free shipping,” you’re absorbing the cost, and the cost is still your deduction.

Packaging supplies are deductible in the year you use them, not necessarily the year you buy them. Boxes, poly mailers, padded envelopes, bubble wrap, packing tape, and thermal label rolls all qualify. Buy in bulk and carry some into next year, and only the portion consumed this year counts as a current-year expense. The rest sits in supplies inventory.

Home Office

Use part of your home exclusively and regularly as your principal place of business, and you can claim the home office deduction.³ “Exclusively” is the word that catches people. A spare bedroom where you photograph, list, and pack inventory qualifies, but only if no one uses it for anything personal. A kitchen table where you also eat dinner doesn’t.

Resellers get a real break on the exclusivity rule for storage. The exclusive-use test does not apply to space used on a regular basis for storing inventory or product samples, as long as your home is the only fixed location of your selling business.³ A garage or closet stacked with inventory qualifies even if it doubles as personal storage.

Two calculation methods are available. The simplified method gives you $5 per square foot of dedicated business space, up to 300 square feet, for a top deduction of $1,500.⁴ The actual expense method applies your business-use percentage to total housing costs, including rent or mortgage interest, property taxes, utilities, insurance, and repairs.⁵ The actual expense method usually produces the larger number but demands more tracking. You can switch between methods year to year.

Vehicle Mileage

Driving to thrift stores, estate sales, retail arbitrage locations, or the post office counts as business use. Pick one of two methods each year. The standard mileage rate for 2026 is 72.5 cents per business mile, meant to cover gas, depreciation, insurance, and maintenance in a single figure.⁶ The actual expense method tracks every vehicle cost (gas, oil, tires, insurance, registration, depreciation) and multiplies the total by your business-use percentage.

Either way, you need a mileage log with the date, destination, business purpose, and odometer readings for every business trip. Entries should be recorded at or near the time of the trip; a weekly log is generally acceptable, but a log put together months later raises red flags.⁷ A smartphone app makes this almost effortless. Reconstructing miles from memory at tax time is the exact pattern auditors look for and reject.

Your daily commute to a regular job is never deductible, but trips from your home office to sourcing locations or shipping drop-offs are business miles because your home qualifies as your principal place of business.

Software, Equipment, and Other Operating Costs

Tools that keep the operation running are deductible as ordinary and necessary business expenses. Subscriptions for inventory management, cross-listing services, bookkeeping programs, and tax preparation software all qualify. The Schedule C instructions specifically note that technology and software tools directly related to operating your business are deductible.²

Small equipment like a shipping scale, label printer, ring light, or camera can typically be deducted in full in the year of purchase under the de minimis safe harbor election. For businesses without audited financial statements (that covers virtually every individual reseller), the threshold is $2,500 per item or invoice. Anything above generally needs to be depreciated over its useful life. The election is made annually with a statement on your return.

Other deductions resellers often miss:

Storage unit rent for offsite inventory space, separate from the home office deduction.
Insurance premiums for liability coverage or product insurance bought to protect the business.
Professional fees paid to an accountant for tax preparation or a lawyer for business-related advice.
Office supplies like printer ink, paper, and file folders used for the business.

Half of Your Self-Employment Tax

Every dollar of net profit on Schedule C is subject to self-employment tax at a combined 15.3% rate, funding Social Security and Medicare.⁸ Employed workers see only half that on their paychecks because the employer covers the rest; self-employed sellers pay both halves.

You can deduct half of the self-employment tax you actually pay as an above-the-line adjustment on Form 1040. This lowers your adjusted gross income even if you don’t itemize, which can move your income tax bracket and affect eligibility for other tax benefits. The self-employment tax itself is reported on Schedule SE, filed with Schedule C.

Qualified Business Income Deduction at 23%

Sole proprietors filing Schedule C may qualify for the qualified business income deduction under Section 199A.⁹ The One, Big, Beautiful Bill Act, signed on July 4, 2025, made the deduction permanent and raised it from 20% to 23% of qualified business income starting in 2026. You claim it on your personal return without itemizing.

Below roughly $201,750 (single) or $403,500 (married filing jointly) in taxable income, the math is straightforward: 23% of net Schedule C profit, subject to certain limits. Above those thresholds the deduction phases out, and additional tests involving wages paid and property held by the business come in. The OBBBA also added a “qualifying entity” requirement, meaning at least 75% of your gross receipts must come from a qualified trade or business. Standard reselling of goods clears that easily.

Income earned through a C corporation or as a W-2 employee does not count toward the deduction. Report it on Form 8995, or Form 8995-A if you’re above the income thresholds. In effect, nearly a quarter of your reselling profit escapes federal income tax.

What Kills Every Deduction: Hobby Classification

If the IRS decides your reselling is a hobby rather than a business, every deduction in this article disappears. You still report all sales revenue as income, but you cannot offset it with expenses, COGS, or losses. The miscellaneous itemized deductions that once allowed partial hobby expense write-offs were suspended by the Tax Cuts and Jobs Act starting in 2018, and the OBBBA made that elimination permanent. A hobby classification in 2026 means zero deductions against your selling income.¹⁰

The IRS uses a rebuttable presumption: an activity that shows a profit in at least three of the last five consecutive tax years is presumed to be a for-profit business.¹⁰ Failing that test doesn’t automatically brand you a hobby, but the burden shifts to you to prove profit intent. The IRS weighs whether you keep businesslike books, whether you’ve changed methods to improve profitability, whether you depend on the income, and whether losses stem from circumstances beyond your control.¹¹

The practical takeaway: keep detailed books, file Schedule C every year, track expenses methodically, and operate with genuine profit intent. Losses in the early years while you build inventory and learn the market are normal and defensible if you can show you’re running the operation like a business.

The Records That Back Every Deduction

Every deduction on Schedule C must be backed by documentation, and the burden of proof falls entirely on you in an audit. Adequate records include original receipts, invoices, bank statements, and platform transaction histories that show the amount, date, and business purpose of each expense.¹²

Three categories need extra attention. Inventory demands a detailed count at the start and end of each tax year, because without those numbers the COGS calculation has no foundation. Mileage requires a log with the date, destination, business purpose, and distance for each trip, maintained close to the time of travel rather than reconstructed later.⁷ Under the actual expense method for the home office, you need records of every housing cost plus a measurement of the business-use area.

Digital records are fine. The IRS has allowed electronic storage of books and records since 1997, provided the system preserves legible, retrievable copies and maintains reasonable controls against alteration.¹³ Photographing receipts with your phone and storing them in an organized cloud folder meets that standard, as long as the images are clear enough to read every letter and number.

Keep records for at least three years from the date you file or the due date, whichever is later.¹² Underreport gross income by more than 25% and the IRS has six years to assess additional tax, so holding records for six years is the safer margin.¹⁴ A dedicated business bank account and credit card is the single most effective thing you can do for clean records, because it draws a hard line between personal and business transactions without constant manual sorting.

1
Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss From Business
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Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
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Internal Revenue Service. Topic No. 509, Business Use of Home
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Internal Revenue Service. Simplified Option for Home Office Deduction
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Internal Revenue Service. Publication 587 – Business Use of Your Home
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Internal Revenue Service. 2026 Standard Mileage Rates
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Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
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Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
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Internal Revenue Service. Qualified Business Income Deduction
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Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit
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Internal Revenue Service. Is Your Hobby a For-Profit Endeavor?
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Internal Revenue Service. Topic No. 305 Recordkeeping
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Internal Revenue Service. Revenue Procedure 97-22 (Electronic Storage of Books and Records)
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Internal Revenue Service. How Long Should I Keep Records