This would be part of your inventory, and would increase the your cost of goods sold, and decreases your gross income from your business.
This goes in the Business section, under Inventory/Cost of Goods Sold. When you keep an inventory, you report your beginning inventory for the year and your ending inventory for the year, and you enter your purchases for the year.
The computation goes like this:
Beginning Inventory +Purchases - Ending Inventory = Cost of Goods Sold.
So anything like damages that reduces your Ending Inventory is going to increase your Cost of Goods Sold, and lower your profit.
Please see the screenshots for where to enter this information.