Obsolete Inventory: Book vs. Tax Write-Off - MKSH (2025)

FAQs

Is obsolete inventory write-off tax deductible? ›

The amount of the tax deduction is equal to the fair market value of the obsolete inventory, less any amount that you are able to recover for the item.

If you have unsold inventory that has become obsolete, damaged, or no longer serves the purpose of your business, you might also be able to claim a tax deduction.

Provision for inventory obsolescence is a common accounting entry, but in order to claim a tax deduction, you need an actual act of destruction. You will find in BIR issuances that you need to invite a BIR representative to witness the destruction.

For tax purposes, a company is able to take a deduction on their tax return for obsolete inventory if they are no longer able to use the inventory in a “normal” manner or if the inventory can longer be sold at its “normal” price.

Debit the cost of goods sold (COGS) account and credit the inventory write-off expense account. If you don't have frequently damaged inventory, you can choose to debit the cost of goods sold account and credit the inventory account to write off the loss.

Obsolete Inventory In Accounting

In accounting, companies must treat obsolete inventory according to GAAP. The general rules require businesses to create an inventory reserve account dedicated to obsolete inventory in their balance sheets. The companies must also expense their obsolete inventory during its disposal.

So any unsold inventory becomes an asset that must first be valued, and then included in the financial statement for the financial period. This unsold stock is known as the ending inventory or EI. It can be calculated as such: Take the beginning inventory or BI.

Summary. Businesses generally must use inventories for income tax purposes when necessary to clearly reflect income. To clearly reflect income, businesses must take inventories at the beginning and end of each tax year in which the production, purchase or sale of merchandise is an income-producing factor.

You should obtain evidence to support the client's assumptions and estimates about the net realizable value and the impairment loss of these items. Effectively addressing inventory obsolescence and slow-moving items in your audit involves robust testing of existence and completeness.

If your business has an inventory, its value is an important part of your taxable income. Writing off inventory that's damaged, stolen or unsellable can cut your tax bill.

What is the most frequently overlooked tax deduction? ›

The retirement saver's tax credit is one of the most frequently overlooked tax breaks, and it can be worth up to $1,000 for single filers and $2,000 for married couples filing jointly.

Depreciation refers to a reduction in value caused by wear and tear, while obsolescence refers to a reduction in value caused by changes in technology or fashion.

Obsolete inventory is written-down by debiting expenses and crediting a contra asset account, such as allowance for obsolete inventory. The contra asset account is netted against the full inventory asset account to arrive at the current market value or book value.

An inventory write-off is the process of removing inventory items from your stock on hand list. This is done when items are no longer saleable due to being damaged, spoiled, stolen or becoming otherwise obsolete.

Understanding Non-Operating Expense

For example, a company may categorize any costs incurred from restructuring, reorganizing, costs from currency exchange, or charges on obsolete inventory as non-operating expenses. Non-operating expenses are recorded at the bottom of a company's income statement.