Tax Deductions for Inventory

Buying, making and storing inventory all cost your business money. Fortunately, many of your inventory-related expenses are deductible when tax time rolls around. Even if you can't sell your inventory, you may be able to squeeze some extra deductions out of it by selling it cheap or giving it away.

The money you spend buying raw materials or finished goods for your inventory is a business expense, along with the labor, shipping and overhead. Rather than deduct these expenses directly, you write them off as the cost of goods sold. If, say, you start the year with $10,000 in inventory, spend $5,000 to get more and end the year with $8,000 in inventory, your cost is $15,000 less $8,000 -- $7,000. That's your deduction.

If you store your inventory in your house, you can take a write-off for the business use of your home. If say, you devote 12 percent of your house to storage, you can deduct 12 percent of your mortgage interest, utilities, property taxes and some of your other expenses. Your home has to be your only place of business, where you use the storage space regularly, to claim the deduction. As of 2013, you can use a simpler formula -- $5/square foot -- to calculate a deduction.

If some of your inventory just isn't moving, you may be better off donating it to charity. Your deduction is either the fair market value of the donation or the cost of the donated inventory, whichever is less. If you're a sole proprietor you don't get to write the donation off as a business expense. Instead, you take it as a personal expense, itemizing it on Schedule A. The same rule applies if your business is a partnership.

An alternative to donating your inventory is to sell it at a loss. The IRS allows you to take a write-off for inventory that isn't worth full value -- it's damaged or there's a newer model already out, for instance -- but you need evidence of the lessened value. You can do that by marking it down, then claiming a loss when it doesn't sell. Another approach is to sell it at a discount to companies that resell goods cheaply.