What Is an Inventory Write-Off?
An inventory write-off removes the value of goods you can no longer sell from your books. This happens when products are damaged, stolen, expired, or simply won't move at any price.
Your inventory sits on your balance sheet as an asset. When that inventory loses value, recording the loss reduces your taxable income — which is the benefit you're working toward.
Why Write-Offs Matter for eCommerce Sellers
For Amazon FBA sellers and Shopify merchants, inventory losses show up in several common ways:
Damage: Products broken in shipping, warehouse accidents, or storage
Obsolescence: Last season's trends, outdated tech, or products replaced by newer versions
Spoilage: Expired food, cosmetics, or supplements
Theft: Missing inventory from warehouses or during transit
Style changes: Products that no longer match current market demand
What the IRS Says About Inventory Write-Offs
The Lower of Cost or Market Rule
Under IRS Regulation 1.471-2, inventory must be valued at the lower of cost or market value — known as the Lower of Cost or Market (LCM) method. If your inventory is now worth less than what you paid for it, you use the lower value on your tax return.
The 30-Day Rule for Subnormal Goods
The IRS allows write-downs for "subnormal goods" — items that can't be sold at normal prices due to damage, style changes, odd lots, or similar situations. The key requirement: you must offer these goods for sale at the reduced price within 30 days after your inventory date.
Example: You have widgets that cost $150 each. The market shifted, and you can now only sell them for $100. To write off that $50 loss per unit, you need to list them at the $100 price within 30 days after December 31st.
Casualty and Theft Losses
If inventory was stolen, vandalized, or destroyed by a natural disaster, IRS Publication 547 allows you to report those losses on Section B of Form 4684. This separate treatment can result in a larger deduction for significant losses.
How Your Cost Flow Method Affects Write-Offs
FIFO (First-In, First-Out)
FIFO assumes you sell oldest inventory first — which makes it a natural fit for write-offs. Older items are natural candidates for obsolescence, you can use the LCM write-down option, and your records clearly show which items have been sitting longest.
When prices are rising, FIFO produces higher reported profits and higher taxes. Write-offs help offset this by reducing your taxable income.
LIFO (Last-In, First-Out)
LIFO has more restricted write-off options. You cannot use the subnormal goods write-down with LIFO, partial value reductions are harder to apply, and selling into older LIFO inventory layers can trigger unexpected taxes. If you're using LIFO, your accountant can help you navigate what's available.
The Small Business Taxpayer Exception
The Tax Cuts and Jobs Act of 2017 created flexibility for small businesses with average annual gross receipts of $25 million or less over the prior three years. This exception can simplify your year-end inventory process, though the basic documentation and timing requirements still apply.
Three Ways to Dispose of Written-Off Inventory
Option 1: Sell to a Liquidator
This is often the most practical choice — you recover some cash and still claim the loss as a deduction.
Example: You have $10,000 worth of inventory that's lost value. You sell it to a liquidator for $1,000. You write off $9,000 as the loss.
Amazon FBA sellers have a built-in option here. The FBA Liquidation program connects you with wholesale buyers, typically recovering 5–10% of retail value. It's not a full recovery, but it's meaningful — and it supports your documentation.
Option 2: Donate to Charity
Donating inventory can provide a tax benefit and benefit your community at the same time. The rules depend on your business structure.
For C Corporations: IRC Section 170(e)(3) may allow an enhanced deduction — your cost basis plus half the difference between cost and fair market value, up to twice the basis.
Example: A C Corp donates coats with a fair market value of $1,000 and a cost basis of $200. The enhanced deduction = $600 (cost basis of $200 plus half of the $800 gain, capped at twice the basis).
For S Corps, partnerships, and sole proprietors: You can deduct up to 15% of net income from donated inventory. Food donations have additional provisions that can be more generous.
Amazon's FBA Donations program works with Good360 to redirect unsold inventory to charitable organizations. You receive a donation certificate for your records.
Option 3: Destroy the Inventory
This is typically the last resort — the deduction is smaller than selling or donating. But sometimes it's the only remaining option.
The most important step here: document before and after the destruction. Photos, videos, and written records of what was destroyed, when, and how are what substantiate your deduction. The IRS requires evidence that the inventory was genuinely disposed of and not sold through another channel.
Step-by-Step: How to Write Off Inventory Before Year-End
Step 1: Identify Dead Stock
Review your inventory for items that:
Haven't sold in 90+ days
Are damaged or defective
Are expired or approaching expiration
Are seasonal items past their selling window
Cost more to store than they're worth
Amazon sellers should pull the Aged Inventory Report in Seller Central. Shopify merchants can use inventory reports to identify slow movers. If your sales channels are connected to QuickBooks via Link My Books, this data flows in automatically — making it much easier to spot patterns across platforms without manual exports.
Step 2: Calculate the Loss Value
For each item, determine:
Original cost: What you paid to acquire the item, including shipping and duties
Current market value: What you can realistically sell it for today
The lower number: This is the value that goes on your tax return
Multiply your cost per unit by the number of units to get your total write-off amount.
Step 3: Document Everything
This is the step that protects the deduction. For every write-off, keep:
Item descriptions: SKUs, product names, conditions
Quantities: Exact unit counts
Dates: When purchased, when they became unsellable, when written off
Reason for write-off: Damaged, obsolete, stolen, expired, etc.
Valuation: Original cost and current value calculations
Photos: Before and after images, especially for damaged or destroyed items
Disposal records: Receipts from liquidators, donation certificates from charities, or destruction documentation
Thorough documentation is what protects your deduction if questions ever arise.
Step 4: Make the Journal Entry
For small write-offs: Debit Cost of Goods Sold (COGS) and credit Inventory. This is straightforward and works well for routine losses.
For large write-offs: Create a separate Inventory Write-Off Expense account. Debit this account and credit Inventory. This keeps significant losses clearly visible on your financial statements.
In QuickBooks, both entries are straightforward to set up — and keeping them categorized correctly ensures your P&L reflects the real picture throughout the year.
Step 5: Choose and Complete Your Disposal Method
Decide how to move the inventory out:
Liquidate: Sell to liquidators, clearance buyers, or wholesale channels
Donate: Transfer to qualified charities and collect donation receipts
Destroy: Dispose of items that can't be sold or donated, with full photo and written documentation
Disposal needs to be completed before December 31st.
Step 6: File Correctly
Most small businesses report inventory write-offs on Schedule C, lines 35–42 — where you report beginning inventory, purchases, cost of goods sold, and ending inventory.
Casualty or theft losses go on Form 4684 instead. Charitable donations of non-cash property over $500 require Form 8283.
Case Study: Turning $15,000 in Dead Stock into Tax Savings
The situation: Diana runs an Amazon FBA business selling phone accessories. She has $15,000 worth of cases for older phone models — 5,000 units across 12 SKUs, all sitting for more than 90 days.
Step 1: Diana identifies all 12 SKUs using her Aged Inventory Report.
Step 2: Her cost is $3 per unit ($15,000 total). Current market value is approximately $0.50 per unit ($2,500 total).
Step 3: She photographs the inventory, exports her sales records, and documents the reason each SKU is obsolete.
Step 4: She creates an FBA liquidation order. Amazon's program recovers $750.
Step 5: On her tax return, Diana reports the $14,250 loss ($15,000 cost minus $750 recovery).
The result: At a 22% tax bracket, Diana saves $3,135 in taxes. Combined with the $750 from liquidation, she recovered $3,885 from inventory that was otherwise a complete loss.
Year-End Checklist for Inventory Write-Offs
Pull aged inventory reports from all sales channels
Identify items with 90+ days without sales
Calculate original cost for each item
Determine current market value
Take photos of all inventory being written off
Document the reason for each write-off
Choose disposal method (liquidate, donate, or destroy)
Complete disposal before December 31st
If using the subnormal goods method, list items at reduced price within 30 days after year-end
Collect receipts from liquidators or donation certificates from charities
Make the journal entry in QuickBooks
Store all documentation in your year-end tax folder
Review with your accountant before filing
Make Your Dead Stock Work for You
Inventory write-offs are one of the most accessible year-end tax strategies for eCommerce sellers — and one of the most commonly overlooked. Done correctly, they reduce your taxable income in a way that's fully supported by IRS rules.
At Tall Oak Advisors, we work exclusively with eCommerce sellers. We help our clients:
Identify all eligible inventory write-offs before year-end
Choose the right cost flow method (FIFO vs. LIFO) for their business
Document write-offs properly so they hold up under review
Maximize deductions while staying fully compliant
Keep books clean in QuickBooks so the picture is always clear
Ready to see what your dead stock could save you? Schedule a free consultation with Tall Oak Advisors and we'll walk through your inventory situation together.
This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently and individual circumstances vary. Always consult with a qualified tax professional before making decisions about your specific situation.
Sources:
National Retail Federation, Retail Shrink Survey 2024
IRS Publication 334, Tax Guide for Small Business
IRS Regulation 1.471-2, Valuation of Inventories
IRS Publication 547, Casualties, Disasters, and Thefts
IRC Section 170(e)(3), Enhanced Deduction for Inventory Donations
Tax Foundation, The Tax Treatment of Inventories (2024)
