Outdated inventory (COGS) as an expense

[rmcgrobi]

New client has $14,000 in old, unusable inventory. Client wants to write it off as COGS in 2015. Client has NO sales in 2015 and will close business in 2016. Would it be better to wait to write off the $14K until the business closes in 2016? Or, what other ideas are out there? Thanks for any/all replies.

[kathyc2]

New client has $14,000 in old, unusable inventory. Client wants to write it off as COGS in 2015. Client has NO sales in 2015 and will close business in 2016. Would it be better to wait to write off the $14K until the business closes in 2016? Or, what other ideas are out there? Thanks for any/all replies.

What does the 2014 show as method for valuing inventory? Unless it's LCM you have a change of method to write it off while still in clients possession. Even though it may be "unusable" in clients business, it likely has some value even if sold to a salvage company for pennies on the dollar.

[Burke]

If it can be used at all by a charitable entity, can you show it as "withdrawn for personal use," then donate it and take a deduction on Sche A?

[spanel]

New client has $14,000 in old, unusable inventory. Client wants to write it off as COGS in 2015. Client has NO sales in 2015 and will close business in 2016. Would it be better to wait to write off the $14K until the business closes in 2016? Or, what other ideas are out there? Thanks for any/all replies.

What exactly is this usable inventory?

[rmcgrobi]

To Spaniel : re Outdated inventory post of 5/11

The outdated inventory is some kind of environmental stuff client bought from a con artist way back when.

[Snaggletooth]

Not all in one year

This inventory didn't "suddenly" become worthless in 2015, if indeed it was ever worth anything at all.

It is clear from the foregoing discussion that your client has never used a "reserve for obsolescence" in its inventory valuation. On the COGS section of the Sch C (or whatever form details COGS), there is a question which asks if your inventory valuation is consistent with the previous year.

Thus deducting in ANY year invokes "no" to the previous question. If there are sufficient sales in 2013 and 2014, I might suggest amending those years by 50% of the loss for each year. You will have to outline the reason for amending the returns, as well as disclose that you are changing inventory valuation methods.

As you might suspect, this suggestion is going to be more visible because the 1040X cannot be electronically filed, and someone in the IRS is going to have to look at it. However, I believe this would be a more equitable handling.

If it were permitted to amend returns back to "way back when" when it was bought, it would probably be even better under the matching theory to amend even further back.

[Roland Slugg]

It is clear from the foregoing discussion that your client has never used a "reserve for obsolescence" in its inventory valuation. On the COGS section of the Sch C (or whatever form details COGS), there is a question which asks if your inventory valuation is consistent with the previous year.

"A "reserve for obsolescence" is not allowed in valuing inventory.

If it were permitted to amend returns back to "way back when" when it was bought, it would probably be even better under the matching theory to amend even further back.

Well, it's not, so that's a moot point. An inventory valuation method, once adopted, must be used consistently in all future years unless IRS permission to change is granted via F-3115. Except for the adoption of the LIFO method, this is not one of the "automatic" changes that are allowed.

However ....

Any goods in an inventory which are unsalable at normal prices or unusable in the normal way because of damage, imperfections, or other similar causes, should be valued at bona fide selling prices less direct cost of disposition, taking into consideration the usability and the condition of the goods, but in no case shall such value be less than their scrap value. (Regs §1.471-2(c))

[JON]

Inventory Gone

It the inventory is worthless than it is thrown away and the value is 0 and even the IRS will agree quickly with you.