Buying, making and storing inventory all cost your business money. The good news, the majority of your inventory-related expenses are deductible when it’s time to file your taxes. If you have the scenario where you can’t sell all of your inventory, you may be able to generate some additional deductions out of it by selling it at a low price or giving it away.
Let’s look at a few options you may have.
(1) Cost of Goods Sold
The money you spend buying raw materials or finished goods for your inventory is a business expense, along with the labor, shipping and overhead. Rather than deduct these expenses directly, you write them off as the cost of goods sold.
For example, if you start the year with $20,000 in inventory, spend $5,000 to get more and end the year with $8,000 in inventory, your cost is $25,000 less $8,000 — $17,000. That would be your deduction.
(2) Storage Space
If you’re storing inventory in your house, you can take a write-off for the business use of your home. For example, if you devote 20 percent of your house to storage, you can deduct 20 percent of your mortgage interest, utilities, property taxes and some of your other expenses. In order to claim this deduction, your home has to be your only place of business and where you use the storage space regularly. Most business owners use an easy to follow formula;
- Calculate $5/square foot
If you’re having trouble selling inventory, you may want to consider donating it to charity. Your deduction is either the fair market value of the donation or the cost of the donated inventory, whichever one would be less.
If you’re a sole proprietor, you can’t write the donation off as a business expense. However, you can take it as a personal expense, you can itemize it on a Schedule A. The same rule would apply if your business is a partnership.
If you don’t have plans to donate your inventory, you could potentially sell it at a lost. The IRS does allows you to take a write-off for inventory that isn’t worth its full value, such as being damaged or if it’s an older model. You can’t just write it down, you would need evidence that it has less value now.
There’s a number of different ways you can do that;
- Marking the price down
- Claiming a loss when it doesn’t sell
- Sell it at a discount to other companies
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