S-Corp writedown of inventory

[JoshinNC]

Here's the question:

S-Corp client shows $130,000 inventory on Jan. 1. Physical inventory on Jan. 1 indicates actual inventory of $100,000. Where, if anywhere, is this "loss" reported on the 1120S? Does the loss flow through to the shareholders as a casualty loss?

Thanks in advance!

[OldJack]

S-Corp client shows $130,000 inventory on Jan. 1. Physical inventory on Jan. 1 indicates actual inventory of $100,000. Where, if anywhere, is this "loss" reported on the 1120S? Does the loss flow through to the shareholders as a casualty loss?

Sudden discovery of an error in inventory is not a casualty loss. You would have to establish what happened to the inventory to have a casualty or theft loss. This is most likely just and adjustment of inventory (costing and counting errors) to be corrected by increasing cost of good sold, page 1, line 2, carried from Sch-A, page 2, 1120S.

[Taxref]

Old Jack gives a good answer above, and I agree with his conclusion.

I am curious as to whether the client did a physical inventory the previous year. If so, steps need to be taken to determine what caused the inventory change. That would be important for internal control purposes much more than for tax purposes.