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csanford2
Level 1

For an S corporation - do I have to physically dispose of the inventory to write it off?

I plan to write down some obsolete inventory by taking it out of inventory and letting the expense flow through COGS.  My question is do I have to physically remove, donate, destroy the inventory to write it off or can I keep it and hope to sell it in the future.  We are an S Corporation.  Also, can you point me to the IRS publication that addresses this issue. Thanks!

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Howard1948
Level 7

For an S corporation - do I have to physically dispose of the inventory to write it off?

The US Supreme Court decided this issue in 1979 in Thor Power Tool Co. vs The Commissioner.  In summary, the Court ruled that a deduction for the write down of obsolete inventory will only be allowed if the inventory is physically disposed of.  They also said that generally accepted accounting principles regarding these writedowns had nothing to do with the tax accounting.  If memory serves me correctly, the deduction will be allowed if the inventory is physically disposed of within 30 days after the writedown.  But you should check this out with your tax advisor to be sure my memory is correct.

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2 Replies
Carl
Level 15

For an S corporation - do I have to physically dispose of the inventory to write it off?

If the S_corp is not closing and  you just need to dispose of the inventory because it won't sell for whatever reason, then just show it as destroyed, donated or given away as a gift. If you do that, then whatever you do, don't attempt to sell it any time in the future.
Howard1948
Level 7

For an S corporation - do I have to physically dispose of the inventory to write it off?

The US Supreme Court decided this issue in 1979 in Thor Power Tool Co. vs The Commissioner.  In summary, the Court ruled that a deduction for the write down of obsolete inventory will only be allowed if the inventory is physically disposed of.  They also said that generally accepted accounting principles regarding these writedowns had nothing to do with the tax accounting.  If memory serves me correctly, the deduction will be allowed if the inventory is physically disposed of within 30 days after the writedown.  But you should check this out with your tax advisor to be sure my memory is correct.

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