What expense category is Shipping?

Shipping costs are a reality for nearly every business that deals with physical goods, whether receiving supplies, purchasing inventory, or sending products to customers. These expenses, encompassing freight, postage, and courier services, need to be correctly categorized for accurate financial reporting, calculation of gross profit, and tax compliance.

Misclassifying shipping costs can distort your Cost of Goods Sold (COGS) and operating expenses. This guide will help accountants and SMB owners understand the proper classification and tax treatment for different types of shipping expenses.

Shipping Expense Category

The correct expense category for shipping costs depends crucially on whether the cost is for incoming shipments (freight-in) or outgoing shipments (freight-out).

1. Freight-In (Shipping Costs for Incoming Goods)

• This includes costs incurred to transport raw materials, supplies, or merchandise purchased by your business. Examples include shipping charges for inventory bought from a supplier or materials needed for production.
• Accounting/Tax Treatment: Freight-in costs are generally NOT treated as a separate operating expense. Instead, they are considered part of the cost of the goods acquired.
• Category: These costs are added to the cost of Inventory or the specific asset purchased. They are ultimately recovered through the Cost of Goods Sold (COGS) calculation when the inventory is sold, or through depreciation if added to the basis of a capital asset. IRS Publications 535 and 334 confirm freight-in is part of COGS.

2. Freight-Out (Shipping Costs for Outgoing Goods)

• This includes costs incurred to ship or deliver products to your customers.
• Accounting/Tax Treatment: Freight-out costs are typically treated as Operating Expenses (specifically, Selling Expenses). They are not included in COGS.
• Category: Common expense accounts include Shipping Expense, Freight Expense, or Delivery Expense.

3. General Postage and Courier Fees

• Costs for mailing standard business correspondence (invoices, letters), marketing materials, or sending documents via courier.
• Accounting/Tax Treatment: These are treated as Operating Expenses.
• Category: Typically classified under Postage Expense, Office Expenses, or General and Administrative Expenses.

Some Important Considerations While Classifying Shipping Expenses

Accuracy requires attention to these points:

• Freight-In vs. Freight-Out: This is the most critical distinction. Freight-in impacts inventory valuation and COGS; Freight-out impacts operating/selling expenses. Mixing them up distorts gross profit margins.
• Uniform Capitalization Rules (UCR): For businesses subject to UCR (generally larger businesses or certain producers), freight-in costs associated with inventory must be capitalized as part of the inventory's cost, not expensed separately. However, many small business taxpayers (generally <= $30M average annual gross receipts per Pub 334/535 threshold provided) are exempt from UCR, simplifying the treatment of freight-in (often included directly in COGS calculation).
• Shipping Costs Billed to Customers: If you bill shipping costs separately to your customers, that billed amount is part of your Gross Receipts (income). The actual cost you incurred for that outgoing shipment is then recorded as a Shipping Expense (freight-out). Don't simply net the two.
• Allocation: If a single shipping bill covers both incoming and outgoing shipments (uncommon but possible), you must reasonably allocate the cost between Freight-in (COGS/Inventory) and Freight-out (Operating Expense).
• Recordkeeping: Keep detailed records from carriers (UPS, FedEx, USPS, freight companies) including invoices, bills of lading, tracking information, and proof of payment. Records should clarify whether the shipment was incoming or outgoing.

Examples of Shipping Expenses

Shipping expenses encountered by businesses include:

• Freight-In: Charges for truck freight, rail, sea, or air cargo to receive inventory or raw materials; UPS/FedEx/DHL charges for inbound supplies.
• Freight-Out: Charges paid to UPS, FedEx, USPS, DHL, or freight carriers to deliver products to customers.
• Postage: Cost of stamps, postage meter refills, online postage purchases (e.g., Stamps.com).
• Courier Services: Fees for local or same-day delivery services for documents or packages.
• Shipping Supplies: Costs for boxes, envelopes, packing materials, tape, labels (Note: Often categorized separately as "Shipping Supplies" or "Packaging," rather than "Shipping Expense").

Tax Implications of Shipping Expenses

Deductibility

• Freight-In: Costs are recovered through Cost of Goods Sold (COGS) when the related inventory is sold. They are not deducted as a separate operating expense.
• Freight-Out & Postage: Deductible as ordinary and necessary operating/selling expenses.

Timing of Deduction

• Freight-In (COGS): The cost is effectively deducted when the inventory is sold, matching the expense with the revenue.
• Freight-Out/Postage: Deductible in the year paid or incurred, based on your accounting method (Cash or Accrual), subject to prepayment rules (e.g., for bulk postage).

Capitalization (UCR)

As mentioned, businesses subject to UCR must capitalize freight-in costs into inventory value. Small businesses exempt from UCR handle these costs more simply.   

Where to Report (Schedule C)

For sole proprietors:

• Freight-In: Included in the Cost of Goods Sold calculation in Part III (usually as part of Purchases or Other Costs).
• Freight-Out / Postage / Courier Fees: Reported in Part II (Expenses), typically on Line 27a ("Other expenses"), specifying the type (e.g., "Shipping Expense," "Freight Expense," "Postage").

How Fyle Can Automate Expense Tracking

Tracking numerous shipping charges and ensuring correct classification requires organization. Here’s how Fyle can help:

• Capture Shipping Charges: Track payments for shipping services made via company credit card using Fyle's real-time feeds. Easily manage invoices paid by other methods by attaching proof of payment.
• Centralize Documentation: Store shipping invoices, carrier receipts, tracking information, and bills of lading digitally within Fyle, linking them directly to the transaction record
• Consistent Categorization: Use Fyle to reliably categorize outgoing shipping costs and postage under the appropriate operating expense account (e.g., Shipping Expense, Postage). Freight-in costs can also be captured, aiding the COGS calculation process in the main accounting system.
• Integration with Accounting Software: Fyle seamlessly syncs the categorized expense data (especially Freight-out and Postage) to your accounting system (QuickBooks, Xero, NetSuite, Sage Intacct), ensuring accurate reporting of selling and operating expenses.

Correctly categorizing shipping costs by distinguishing between freight-in (part of COGS/inventory) and freight-out/postage (operating expenses) is essential for accurate financial reporting and tax compliance. 

Understanding whether Uniform Capitalization Rules apply to freight-in is also key for relevant businesses. Maintaining detailed records and utilizing tools like Fyle can simplify the tracking and management of these diverse logistical expenses.