Yes, you can account for the value of damaged inventory. The actual cost of damaged inventory reduces the value of ending inventory. Rather than taking a direct deduction for written-off inventory, you use Schedule C to factor the loss into your COGS. You report your beginning inventory, purchases and direct costs on Part III of Schedule C. After subtracting your ending inventory, the result is the cost of goods sold. A lower ending inventory value gives you a higher COGS and thus a lower gross profit. Your gross profit is normally the main determinant of your net income and tax obligation, so damaged inventory reduces your tax bill.
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