![]() ![]() ![]() Mitigating Losses by Writing Down Inventory This also applies to businesses liquidating inventories in preparation to declare bankruptcy. Write-downs for unsalable inventory should occur in the fiscal year that the inventory becomes unsalable. It’s up to the taxpayer to justify the value of these goods when submitting the write-down amount. Raw or unfinished goods: If the goods consist of raw materials or partly finished goods held for use or consumption, they should be valued on a reasonable basis taking into consideration the usability and condition of the goods, but never at less than scrap value.The IRS held that a taxpayer using the lower of cost or market method could write down inventory unsalable at normal prices to a contract price (established within 30 days of its year-end)-even though that price was less than the market value for normal goods in inventory under ordinary circumstances. General goods: The precedent for write-downs on general goods comes from Technical Advice Memorandum (TAM) 9729001.Manufacturers need to be cognizant of both. However, there’s a difference between general finished goods and raw or unfinished goods. Unsalable inventory items should be valued at bona fide selling prices minus the direct cost of disposition. You must exclude any finished products currently being offered at their original price or a price above historical cost. These are generally items for which you may be setting up inventory reserves or have not moved in a significant period of time. The key is to identify those old products that are considered unsalable by reviewing your inventory listing. The first step in determining the value of a write-down is to identify the amount of unsalable inventory. An inventory write-down eliminates these amounts on your balance sheet.ĭetermining Items Eligible for a Write-Down The larger the percentage of unsalable inventory, the greater the drain on your profits. Unsalable inventory isn’t a blanket term for “inventory you didn’t sell.” Rather, it’s inventory that producers can’t sell at fair market value.Īccording to IRS Regulation 1.471-2, subsection C, this inventory is defined as, “unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange.” However, tax regulations may allow for inventory write-downs to occur in certain circumstances even if it’s not sold or disposed. Most manufacturers continue to maintain the inventory on the books at historical cost plus cost of production where applicable. Furthermore, the inventory remains on the books and generally won’t be written off until the item is sold or disposed. No matter the circumstances, unsalable inventory brings with it a litany of hidden costs. Every product that rolls off your production line has a chance to depreciate over time. It can take the form of defective products, obsolete products, a surplus of finished goods, or simply inventory that’s gotten old. Every manufacturer deals with unsalable inventory or inventory whose fair market value as fallen below cost. ![]()
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