Inventory plays a large part in the operations of many businesses. Despite your best efforts you may eventually find yourself with obsolete or worthless inventory on your hands.
When you find yourself in this situation you may wonder if any of it can be written off as a tax deduction, there are three ways that may allow you to deduct some of these costs for tax purposes:
1. Charitable Donations
The first method is to donate the inventory to a charity. By donating your unusable inventory to a qualified charity, you will be allowed a charitable deduction for the cost of the donated inventory. Make sure to get a receipt from the charity!
Typically, an appraisal is required when claiming a charitable donation in excess of $5,000 on a non-cash item. If the inventory you donate is held for sale to customers as part of your normal trade or business an appraisal is not required.
Note that if the charity directly uses the inventory you donated for the care of infants, the needy, or ill additional deductions may be allowed.
2. Bona Fide Sales
The IRS regulations allow you to write down the cost of your inventory that is unsaleable at its current prices or unusable in its normal way to its “bona fide sales price”. The lower price or “bona fide sales price” must be determined in a reasonable and realistic manner, and it can't be less than the inventory’s scrap value.
To support the “bona fide sales price” you use, you must list the written-down inventory for sale at the lower price within 30 days of writing it down. The IRS will disallow your deduction if you simply reduce your inventory cost but do not actually attempt to sell it for the reduced price.
You could also sell your inventory to a salvage yard or liquidator. As long as it's not done on consignment and you no longer have ownership rights to the inventory, you would be allowed to deduct the inventory costs for tax purposes.
Destruction of Inventory
The final method, and typically last approach you would want to take, is to destroy your old inventory. By doing so you have effectively sold it for $0 which allows you to deduct your cost in the destroyed inventory.
Sufficient documentation should be maintained including before and after photos of the destroyed inventory. You will also want to keep any records/documentation you have from your initial purchases of the inventory.
Having worthless or obsolete inventory on your hands is not an ideal situation to be in but it happens, and you have a few options of handling it for tax purposes.
