I have a small business owner (gross receipts well under $25M per year) that sells physical goods. 

Their P&L reports COGS to me and they file taxes on a cash basis. 

I understand there is a way for them to report COGS as non-incidental materials and supplies (NIMS). 

My question is: how should I be entering this into Proconnect? 

Option 1: Enter the COGS as an expense on the supplies line 22 of schedule C

Option 2: Enter the COGS as materials and supplies on line 38 in part III of schedule C

Are there other reporting requirements for this taxpayer that I need to be aware of, such as lines 35 or 41 in part III of schedule C or filing? 

This is the first tax year of them having these expenses. 

Thank you for your help!