If you find your company in this position, consider both aspects. In addition, the IRS requires you to document the before and after of the inventory that is destroyed. The deductions associated are more minimal than if the previous 2 approaches are taken. Destroying it – This is typically the last approach you would take. If the inventory is used directly to care for the needy, ill, or infants additional deductions may be available.ģ. Donating it – A tax deduction may be taken if the obsolete inventory is donated to a charitable cause at no cost to the charity. The deduction received in this case is equal to the amount of the fair market value, less what you are able to recover for the item.Ģ. Rather, this is the sale of inventory to a place such as a liquidator or junkyard.

Selling it – This does not mean selling the inventory at a reduced price to your existing customer base. The ability to take a tax deduction for obsolete inventory can only occur if the inventory is disposed of in 1 of 3 ways:ġ. Let’s take a look at the tax rules.įor tax purposes, a company is able to take a deduction on their tax return for obsolete inventory if they are no longer able to use the inventory in a “normal” manner or if the inventory can longer be sold at its “normal” price. While the process of writing off inventory for GAAP purposes is rather straightforward, being able to get the tax deduction is not quite as direct. Therefore, if a company is not regularly reviewing their inventory for obsolescence they could have a large hit to their bottom line. GAAP requires that all obsolete inventory be written off at the time it’s determined obsolete. Assuming no receipt of payment for the inventory, you will debit a cost of goods sold account and credit either inventory directly or your inventory reserve account. In regards to GAAP, once you have identified inventory that you cannot sell, you must write this inventory off as an expense. So how do you account for obsolete inventory? There are different rules that need to be considered for Generally Accepted Accounting Principles ( GAAP) vs. Regardless of how lean you’re able to keep your warehouse, you will likely have to deal with obsolete inventory at some point. One of the largest assets for a manufacturer is its inventory.

Inventory writedown in real estate