Should you write off or sell excess inventory?

Should you write off or sell excess inventory?

Sell it if it can be sold. A sale brings cash now, ends the storage bill, and the sale price itself documents the lower value. A write-off brings no cash and is mainly for goods that cannot be lawfully or practically sold. The tax treatment of each choice depends on your situation, so confirm it with your CPA.

This page is not tax advice. It sets out the business questions that sit around the accounting, so that your conversation with your adviser is short and your decision is made on cash, not on habit.

Four different things people call a "write-off"

These are often mixed up in conversation. They are different events with different records.

• Write-down. You still hold the goods, but record them at less than cost because they are worth less. Your accounting method decides how. In the US, Treasury Regulation § 1.471-2(c) deals with "subnormal" goods, which can in some cases be valued at a bona fide selling price; there are conditions, and your tax adviser should confirm whether and how they apply.
• Sale at a loss. You sell the goods below cost. The loss shows up through the sale. You get cash.
• Donation. You give the goods to a qualifying charity. In the US, C corporations may qualify for an enhanced deduction for certain donations under IRC § 170(e)(3), subject to conditions. Confirm with your tax adviser. See donation versus liquidation.
• Destruction. You pay to destroy, recycle or landfill the goods, usually with a certificate. You get no cash and spend money. See is liquidation better than destruction.

What does holding stock for a write-off cost?

Every month you hold goods while deciding, you pay storage, insurance, the cost of the money tied up, and some loss to damage or theft. Add them up from your own books as a monthly cost per pallet. You also lose resale value as the season passes, dates approach and newer models arrive. Use your own figures where you have them; the point is that waiting is never free.

The decision framework

Work down the table and stop at the first row that describes your goods.

Then ask your CPA these questions before you act:

1. How should we value this inventory at our next count, and what evidence do you need?
2. If we sell below cost, how is the loss recognized?
3. If we donate, do we qualify for any enhanced deduction, and what paperwork does the charity need to give us?
4. If we destroy, what proof of destruction do you need?
5. Does the timing (this tax year or next) change the answer?

Worked example: one pallet line, three outcomes

Illustration only — hypothetical figures, not market prices, carrying costs or tax results.

A distributor holds a lot of discontinued phone cases that cost C in total. A buyer offers S for the lot, collected from the dock. Storage is costing the distributor s a month for the space.

Option 1: sell now. Storage stops. The difference between cost and sale price, C − S, shows up as a loss through the sale, subject to your adviser's treatment.

Option 2: hold six months, then write off. The full cost C is written off, subject to your adviser's treatment. Compared with Option 1, the business is S + 6 × s worse off in cash, before any difference in tax.

Option 3: hold six months, then sell. Discontinued goods rarely fetch more later, so S2 is usually below S. The net is S2 − 6 × s, against S for the same sale six months earlier.

The tax effect of each loss depends on your tax rate and rules, so your CPA has to fill in that line. But the cash lines do not change: selling sooner left the most money in the business.

Can you sell part and write down the rest?

Yes, and it is often the most sensible outcome. Most excess lots are not one thing. A distributor may hold saleable new goods, short-dated goods with a small market, and damaged goods with no market at all. Treat each part on its own: sell the first, find the right buyer or donee for the second, and dispose of the third with proper records. Mixing them into one lot usually drags the whole price down to the worst part.

Splitting also helps the paperwork. Each part has its own evidence: a sale invoice, a donation receipt, a destruction certificate. Your adviser can then treat each part on its own facts instead of guessing at a blended value.

Evidence that supports a lower value

If your adviser needs support for valuing goods below cost, these records help, and the process of selling creates most of them:

• written offers from buyers, even ones you declined;
• a sale contract and invoice at the lower price;
• photos and counts showing condition at the time;
• date-code samples for dated goods;
• the reason the goods became excess (discontinued notice, canceled order, recall notice).

Mistakes to avoid

• Treating a write-off as free money. A tax effect, if any, is worth only a share of the loss. A sale brings cash and still records the loss.
• Destroying saleable goods to avoid paperwork. It costs money, wastes product and may still need documents.
• Donating without asking your adviser first. The deduction rules have conditions; the charity's paperwork matters.
• Letting the bad stock set the price for the good stock. Split the saleable goods out and sell them separately.
• Not keeping offers. An email offer for the lot is evidence of value. Keep it, even if you decline.
• Ignoring brand risk until the end. If you need restrictions, decide them early. The guide to liquidating without hurting your brand explains the cost of each one.

Where to go next

If selling wins, the guide to how much liquidators pay explains how offers are built, and how to sell excess inventory fast shows how to close quickly. Brands and manufacturers can read about their particular concerns in selling closeouts as a brand or manufacturer. Send Skyline Dealz the details to get an offer on your excess inventory, then take that offer to your CPA alongside the write-off figures. For every option side by side, see the complete guide to selling excess inventory.