If you have items that have been sitting on your shelves for some time, it's costing you money. You're paying storage and other costs and you're missing the opportunity to put the investment in those items to more productive uses. Before year-end take appropriate steps to trim your excess inventory -- and gain tax benefits as well.
Mark down slow movers. In order to nail down a deduction for excess or slow-moving inventory, you generally must first offer it for sale at a substantially reduced price. When that fails to generate sales, you can then deduct your costs.
Donate excess items to charity. You'll benefit the organizations and, by removing the items from your shelves, generate a tax deduction as well. How your business is organized affects the write-offs you can claim.
- For pass-through entities (partnerships, limited liability companies and S corporations)the owner's share of the charitable contribution deduction passes through and is claimed on the owner's personal tax return (assuming the owner itemizes deductions). The amount of the deduction passed through is the owner's share of the deduction figured at the entity level. The deduction is based on the property's fair market value on the date of the contribution, reduced by any gain that would have been realized if it had been sold instead of donating it. For example, the business paid $12 for an item now worth $10. A donation would generate a deduction of $10 ($10 current value less 0 gain since a sale in this example would have generated a loss).
- For C corporations, the corporation deducts charitable contributions up to 10% of taxable income. Donations of inventory to special charities can result in enhanced write-offs. The write-off for inventory that will be used for the care of the ill, the needy, or infants can be increased by 50% of the difference between the property's basis and its fair market value. But in no event may the write-off exceed 200% of the property's basis. Similar enhanced write-offs apply to the donation of scientific property used for research and certain computer equipment to schools or libraries.
Caution: After donating the items, be sure to remove them from your opening inventory account. If the inventory was manufactured by you (instead of purchased by you), also remove from the cost of goods sold your materials, labor, and other indirect costs that were included in the cost of production.
Author Barbara Weltman