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Schmidt Blog

Write off Inventory? You Bet For Many Small Business Taxpayers

December 7th, 2018

Beginning in 2018 several small businesses may be able to write off their inventory for tax purposes.  Under old rules, the use of inventories was necessary to clearly determine the income of the taxpayer.  Effective for tax years beginning after 2017, a taxpayer with average gross receipts of $25 million or less is not required to use inventories.  Instead, the business may account for inventories as non-incidental materials and supplies.  However, there is a catch.  The taxpayer cannot write off inventory if it keeps track of inventory on its “Applicable Financial Statement” or, by accounting for inventory on its normal books and records.

An Applicable Financial Statement means: 1) A financial statement certified as being prepared in accordance with “generally accepted accounting principles” (GAAP) and which is: a) a 10-k or annual statement to shareholders required to be filed with the SEC, b) if there is no financial statement described at item a), an audited financial statement used for i) credit purposes, ii) reporting to shareholders, partners, or other proprietors, or beneficiaries, or iii) any other substantial nontax purpose.

In general, a business would not be allowed to write off inventory if it accounts for its inventory on its financial statements.  If a business decides to start writing off inventory it would have to file for an automatic change in accounting method as well with its tax return.  These rules are very complex but could also result in some big tax savings for many small businesses.





Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of promoting, marketing, or recommending to another party any transaction or matter addressedherein. The preceding information is intended as a general discussion of the subject addressed and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research verifying the conclusions reached. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and law applicable to the situation.

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