Checkmark iconCan I Write This Off?

can i write off inventory

TL;DR

Inventory itself is not directly deductible as an expense; instead, it is accounted for as part of the cost of goods sold (COGS), which reduces taxable income.

Detailed Answer

Inventory is not a direct tax deduction. Instead, it is included in the calculation of the cost of goods sold (COGS), which is subtracted from gross receipts to determine gross profit. COGS includes the cost of products or raw materials, including freight, storage, and direct labor costs. Inventory must be valued at the beginning and end of each tax year to accurately calculate COGS. If inventory is not properly accounted for, it can lead to inaccuracies in reported income and potential IRS scrutiny. Businesses must choose an inventory valuation method (e.g., FIFO, LIFO, or specific identification) and consistently apply it. Inventory write-offs may occur if items become unsellable, but this must be documented with evidence such as damage reports or obsolescence.

Where to Put It on the Tax Form

Schedule C, Part III, Line 42 (Cost of Goods Sold).

Real World Example

A small e-commerce business owner purchases $10,000 worth of inventory during the year. At year-end, they have $2,000 of inventory remaining. They report $8,000 as COGS on Schedule C, Line 42, reducing their taxable income accordingly.

Calculation Required

A calculation is required for this deduction.

To calculate COGS, use the formula: Beginning Inventory + Purchases - Ending Inventory = COGS. For example, if beginning inventory is $5,000, purchases are $10,000, and ending inventory is $2,000, then COGS is $13,000.

Audit Risk & Documentation Tips

Moderate audit risk. Keep detailed records of inventory purchases, sales, and year-end counts. Maintain invoices, receipts, and any documentation supporting inventory valuation methods. Regularly review inventory for obsolescence and document any write-offs with photographs or reports.

IRS Reference

IRS Publication 334 (Tax Guide for Small Business), IRS Publication 538 (Accounting Periods and Methods), IRC §471.

Relevant Industries

RetailManufacturingE-commerceWholesale

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Disclaimer: This is for informational purposes only and should not be construed as tax or legal advice. Always consult your tax advisor.

Page created on April 15, 2026

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