Can sales commissions be COGS for a small stockbroker?

[Max W]

Stockbroker pays commissions and wages to sales associates.  Can these be considered COGS?

Volume is over $5M and commissions run 1 to 2%.

[Lee B]

Are these sales associates his employees? Personally I would consider their wages to be an operating expense.

[mcb39]

I can't imagine commissions being anything other than an expense.  They are intangible; so how do you relate to COGS?

[Abby Normal]

Stocks are intangibles and intangibles are not "goods."

[JohnH]

I had a somewhat similar situation with a freight broker client for many years. In Quickbooks and on their financial statements, we would show gross billings and then use a contra-account to reduce gross revenue by the amount of the payments made to the carriers.  The contra-account showed up as a negative revenue entry.  We did this in order to have a better handle on the "true" net revenue in evaluating operations.  From an accounting standpoint, this was essentially the same as having a cost of goods sold entry. 

But on the tax return, I would simply move the amount of the contra-account into "other expenses" for tax reporting.  Operational net income was the same by either method, so the tax return agreed with the books.  But I'm sure it would have required some explaining if an  audit had ever come our way.  

[mcbreck]

Sales commissions are not a COGS, they are an operating expense and included on line 10.

Now if they paid a percentage of revenue to a clearing firm, I consider that a COGS. For example if I'm an investment advisor clearing through Charles Schwab and Schwab takes 10% of my revenue and pays me the 90%, that's a COGS. Reality is that most probably don't include the 10% in their income or expenses because they never see it. They book the money coming in and ignore the expense in their accounting.

[Abby Normal]

9 hours ago, mcbreck said:

Reality is that most probably don't include the 10% in their income or expenses because they never see it.

I had a very small broker and every year he'd remind to record the 10% cut to Schwab and I'd debit commission expense and credit sales without explaining to him that the bottom line is the same either way. He was happy and that's all that counts.