Tax Planning - Understand Inventory Write-Offs
June 12, 2024
Effective inventory management is essential for any business's financial health. Companies often hold damaged, defective, obsolete, or unsalable inventory in a back room or the corner of their warehouse. This can lead to an out-of-sight, out-of-mind issue. Writing off inventory can be an overlooked tax saving you should plan for each year.
Inventory write-offs refer to removing inventory from the accounting records due to its inability to be sold or used. This can include damaged goods, defective products, obsolete items, outdated stock, or no longer-needed inventory. By writing off such inventory, businesses acknowledge the loss and adjust their financial statements accordingly.
Best Practices for Inventory Write-Offs
A common best practice is to accelerate losses related to inventory by disposing of or scrapping it before year-end. This practice helps accurately reflect the company's financial position and prevents the overstatement of assets.
However, there's an exception to this standard treatment known as "subnormal" goods.
Understanding "Subnormal" Goods
"Subnormal" goods are unsaleable at regular prices or unusable in the way they were intended for various reasons, such as damage, imperfections, wear and tear, odd pieces, or breakage. Despite being unsalable or unusable, these items may still hold some value.
Treatment of Subnormal Goods
Businesses can write down the inventory cost to the actual offering price *within 30 days after year-end,* less selling costs for subnormal inventory. This means that even if the inventory is not sold or disposed of by year-end, the company can adjust its financial statements to reflect the reduced value of these goods.
Including the write-down of subnormal goods when appropriate, businesses can more accurately represent the actual value of their inventory and prevent overstatement of assets.
How To Plan - Next Steps
Talk to the Cambaliza McGee, LLP team to discuss your inventory issues. We will help educate you, as it is crucial for you as a business owner to do your due diligence and become familiar with the rules and process of inventory write-offs.