What expense category is Beverage?

For any restaurant, bar, or café, the cost of beverages—whether alcoholic or non-alcoholic—is a primary driver of revenue and a major operational expense. To accurately measure profitability, it is essential to track the costs of liquor, beer, wine, and soft drinks separately, as each category has a different margin.

For tax purposes, a common and critical accounting error is to treat these purchases like general supplies. Instead, all beverage costs must be accounted for as Cost of Goods Sold (COGS). This guide will break down how to correctly categorize your beverage purchases as COGS, the importance of inventory management, and how to stay compliant with IRS rules.

Beverage Costs (Alcoholic & Non-Alcoholic) Category

The costs of all beverage items you purchase to resell to customers are not a standard expense category. Instead, they are a fundamental component of your Cost of Goods Sold (COGS).

IRS Publication 334 explains that if the purchase or sale of merchandise is an income-producing factor in your business, you must use inventory and calculate your Cost of Goods Sold. COGS is a calculation, not a single line item, that is subtracted from your gross receipts to determine your gross profit.

Important Considerations While Classifying Beverage Costs (as COGS)

To correctly calculate your COGS and effectively manage your business, you must accurately track your beverage inventory and separate your costs by category.

The Cost of Goods Sold Formula

The IRS requires you to use a specific formula to calculate your COGS for the year: 

(Inventory at the beginning of the year) + (Cost of Purchases) - (Inventory at the end of the year) = Cost of Goods Sold.

• Beginning Inventory: The value of the beverage inventory you had on hand at the start of the year.
• Purchases: The cost of all beverage items you bought during the year for resale.
• Ending Inventory: The value of the beverage inventory you have on hand at the end of the year.

Inventory is Mandatory

Because the sale of beverages is a primary income-producing factor, you are required to use inventory to reflect your income. This means physically counting and valuing your beverage stock at the beginning and end of each tax year.

Internal Tracking: Separating Beverage Categories

While the IRS only requires a single purchase figure for your tax return, for successful business management, it is essential to track your beverage costs in separate categories in your accounting system. This allows you to:

• Calculate the cost percentage for each category (e.g., liquor cost %, wine cost %).
• Analyze the profitability of each part of your beverage program.
• Identify areas of waste or an opportunity to adjust pricing.
• Typical categories include: Liquor, Beer, Wine, and Non-Alcoholic Beverages.

Tax Implications and Recordkeeping

Your gross profit is calculated by subtracting your total COGS from your gross receipts. Therefore, accurate tracking of beverage costs is essential for correct tax reporting.

How to Report COGS

For a sole proprietor filing a Schedule C (Form 1040), the Cost of Goods Sold is calculated in Part III of the form. The total cost of all beverage and food purchases is included on Line 36, purchases, and your inventory values are reported on Line 35 and Line 41.

What Records to Keep

You must have documentary evidence to substantiate all your beverage costs. Your records should include:

• Invoices from all liquor, wine, beer, and soft drink distributors and suppliers.
• Canceled checks or other proofs of payment.
• Detailed inventory sheets from your physical counts at the beginning and end of the year.

How Fyle Can Automate Expense Tracking for Beverage Costs

Fyle helps you capture and organize the high volume of supplier invoices for your beverage program, providing a clean record for your COGS calculation and internal analysis.

• Capture All Supplier Invoices: Forward or attach your beverage distributors' invoices directly to Fyle for automatic and accurate data capture.
• Track by Beverage Category: Code each purchase to a specific category (e.g., Wine Purchases, Liquor Purchases) for precise cost analysis.
• Create a Clear Audit Trail: Fyle keeps all supplier invoices and proofs of payment in one place for easy substantiation of your purchases.
• Automate Your Accounting: Sync categorized beverage purchase data directly to the correct purchases or COGS sub-accounts in your accounting software.