Can I Take A Tax Deduction For Closeouts And Dead Inventory?
Obsolete inventory can be a pain to deal with. It's taking up space in the warehouse, it isn't selling, you're losing money just holding on to it. Excess inventory buyers who specialize in buying closeouts can help you liquidate inventory once and for all. There are tax breaks for obsolete inventory if it is donated to a charitable cause or if you sell at a loss to closeout distributors, closeout wholesalers or other surplus inventory buyers.. Inventory can also reduce capital assets if it can be sold or destroyed following Internal Revenue Service (IRS) guidelines
Every import company and wholesale liquidator deals with unsalable inventory or inventory whose fair market value as fallen below cost. Closeouts and overstock inventory are part of running any kind of distribution business. It can take the form of defective products, obsolete products, a surplus of finished goods, or simply inventory that’s gotten old. Every product that rolls off your production line has a chance to depreciate over time. You can liquidate inventory of this nature to excess inventory buyers and other closeout distributors who know how to place your products into a secondary market where they will have value again. These companies that buy liquidations are experts in the field of surplus inventory, liquidation inventory and closeouts. They can quickly help you get rid of too much inventory, shut down a 3PL warehouse or close your Amazon FBA due to excessive storage costs.
No matter the circumstances, unsalable inventory brings with it a litany of hidden costs. Furthermore, the closeout inventory remains on the books and generally won’t be written off until the item is sold or disposed. Most manufacturers continue to maintain the inventory on the books at historical cost plus cost of production where applicable. However, tax regulations may allow for inventory write-downs to occur in certain circumstances even if it’s not sold or disposed of. It is always best to discount inventory as you go along so you don’t accumulate too much inventory overtime, and have it sitting in the warehouse. Dead stock is a big problem for many companies because the merchandise is not moving and taking up warehouse space. It is much more cost effective to get rid of closeouts to excess inventory buyers before it becomes such a big problem that you cannot deal with it.
Writing down unsalable inventory is a way for you to speed up a tax deduction that might otherwise weigh down your balance sheet. A write-down lowers your total liability by reducing taxable income. The simple way to do this is to liquidate inventory for whatever amount you can get for it, thus reducing the value from an over-inflated asset to a hard cash amount. This in effect is a write down because you own less of the asset on your books. Closeout distributors and overstock liquidators specialize in buying excess inventory of this nature, and they can quickly size up the value, make you an offer, and schedule a pickup.
While inventory write-downs serve an important purpose, however, you shouldn’t rely on them to absolve huge losses year after year. Occasional closeouts and overstock situations are one thing, but consistently having too much of the wrong inventory is a sign of poor planning. If your warehouse is filled with surplus products that aren’t moving, you will likely lose a lot of money if you are always selling below cost to inventory liquidators and surplus inventory buyers. If you’re constantly left with large amounts of closeouts and unsalable inventory, you need to investigate why this keeps happening. Otherwise, it’ll catch up to you in the form of crunched cash flows and losses produced.
Also, be mindful that an inventory write-down is not the same as a write-off. Determining the value of a write-down is imperative for proper accounting and shouldn’t be confused with a write-off, which marks a total loss on the balance sheet. Finally, remember that once inventory has been written down, it can’t be written back up! So think about the inventory you are liquidating and be sure you cannot still use it for something. In today’s environment it may be cheaper to use inventory for something else rather than dispose of it, simply to go out and re-buy something else. Supply chain channels are constricted and it isn’t easy to replace liquidation inventory with new products. This is the reason 3PL warehouses are opening in large numbers across America – there is so much inventory that needs to be stored.
Companies looking to reduce excess inventory, overstock and aged inventory and take a tax deduction may donate obsolete inventory to a charitable cause. An agreement is made between the charity and you, saying the items were donated at no cost to the charity. You may deduct the fair market value for the inventory from your taxes following the donation. Inventory receipts signed by the charity and your business will document the transaction. The IRS offers additional tax breaks if the donated inventory is used directly to care for the ill, the needy or infants. If you sell excess inventory to a closeout wholesaler, closeout distributor or closeout liquidator you may not be able to take the same size tax deduction.
You can sell the products in a clearance or markdown sale, as an attempt to clear out inventory. This does not offer any tax breaks under the IRS. Instead, you would be able to record the sale as a business transaction. As long as the product sells for cost, the business can save money on storage fees and inventory calculations. If the product sells for less-than-cost, depending on the amount of loss, certain IRS tax deductions and credits may apply. A certified public accountant can help you understand which items may carry loss credits with the IRS.
If you’re writing off small amounts of inventory, you don’t require separate disclosure on the income statement. Instead, the loss is included in with the COGS amount. There aren’t always reasonable explanations for why something didn’t sell and needs to be disposed of. Sometimes the inventory is old and you just want to get rid of it; sometimes there is something wrong with the inventory making it unsalable for the end user. Sometimes, a 3PL warehouse is moving or closing and you have too much inventory you have to get rid of. Sometimes, due to a business closing or an owner retiring you have to liquidate.
However, if you’re writing off large dollar amounts of inventory, it has to be disclosed on your income statement. A separate account such as inventory write-off expense account is included with the other inventory accounts. The loss this account should appear on the income statement each time inventory is written off. It doesn’t matter what the products are; in other words it can be closeout housewares, overstock toys or obsolete lawn and garden products. The closeout process will always be the same.
It’s vital to remember that the loss or reduction in value of inventory cannot be spread and recognized over multiple periods, as this would imply that there is some future benefit associated with the inventory item. This is why inventory write-off must be recognized at once.
The first thing is, get it off the books. Most businesses report inventory at historical cost for property tax purposes. But if an item’s market value has dropped below its original cost, writing it down or writing it off your books can reduce your property tax costs. Be sure that your inventory valuations are well-supported and documented. Depending on your industry, it may be appropriate to establish a policy for writing down certain items gradually as they age. Consumers needs are always changing and this leads the way to having obsolete or overstock inventory sitting in the warehouse. What used to sell well may not sell well anymore. Of it may be selling well on Amazon, but it is simply too expensive to continue doing.
Follow up that item by getting it off the shelves. Write-offs may make inventory disappear from your financial statements and the property tax rolls, but unless you physically dispose of it, the costs remain very real. 3PL warehouses are very costly and many times companies are forced to move 3PL’s or shut down 3PL warehouses to save warehousing costs. Plus, you can’t take a tax deduction for inventory that’s still sitting on your shelves, worthless or not. To qualify for a tax deduction for excess or obsolete inventory, you must do one of three things: (1) sell it in a bona fide sale—to a closeout liquidator or scrap dealer, for example, (2) destroy it, or (3) donate it to charity. If you sell overstock inventory, the deduction is generally equal to the excess of your tax basis in the property (usually your cost) over the price you receive for it. A sale is not considered bona fide, however, if you retain any special rights in the property, such as the right to buy it back for a below-market price. If you destroy inventory, presumably it has no salable value, even for scrap. In that case, you should be entitled to deduct your full tax basis. The deduction for charitable donations is generally equal to the property’s market value, but no more than your tax basis in the property. Certain inventory donations, however, are eligible for an enhanced deduction. A C corporation that gives inventory to a charity for the care of the ill, the needy or minors, can deduct 50 percent of the amount by which the property’s value exceeds its tax basis (but no more than 200 percent of basis).
Merchandise USA is an inventory liquidator in business 37 years. We buy closeout toys and games, closeout housewares, closeout home décor and overstock lawn and garden merchandise. If you are shutting down your 3PL or moving 3PL warehouses contact us with all your closeouts.
