Tax Code & Writing Off Inventory
If your business has an inventory, its value is an important part of your taxable income. Writing off inventory that’s damaged, stolen or unsellable can cut your tax bill. Federal tax law allows you to write off items you lose to theft or disaster, and there are steps you can take to claim a tax write-off for inventory you can’t seem to sell.
If you lose inventory to theft, or because a fire, flood or other disaster damaged your business, you can claim your loss as a tax deduction. Once you calculate the amount of your loss, you can either include the amount as part of the cost of goods sold or as a separate adjustment to inventory. In either case, if you receive any insurance reimbursement for your inventory, you must reduce your claimed loss for the amount your insurer paid you.
Even if your store doesn’t catch on fire, you may discover when you take a physical inventory that your business doesn’t have as much inventory as your bookkeeping says it should. Federal tax law allows you to adjust your inventory for shrinkage. You don’t have to determine the exact shrinkage every year: If your physical inventory for previous years shows a historical pattern of shrinkage, the Internal Revenue Service will allow you to claim that as your shrinkage amount in the current tax year.
If you’ve overstocked your shelves and you can’t get rid of your inventory, there are ways to dispose of it and claim a tax loss. You can sell it to a company that specializes in handling obsolete or overstocked merchandise. You can donate the inventory to charity and claim a write-off that way, or you can simply destroy it. The IRS may scrutinize your claims carefully, so make sure that you have records to prove your case. If you destroy your stock, for example, “before” and “after” photos might come in handy.
To determine your write-off, you have to determine the value of your inventory using one of the IRS-approved methods. The cost method includes all direct and indirect costs associated with your inventory, such as the price of the inventory, the associated costs of transporting goods or raw materials to your store, and any discounts you received. The alternative method, “lower of cost or market,” compares the cost to the market value of the inventory. You can use whichever figure is lower.
You can write off your used computer, electronic, lab and R&D inventory with us.
Author Fraser Sherman, Demand Media