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.