How Does Inventory Affect Taxes?

Inventory Tax Deduction

So, it is tax season and you want to take advantage of any legal tax breaks available to you. Inventories are unused assets that are tax deductible. Unfortunately, it is all too often one of those things that some will over or undervalue to avoid paying higher taxes because it shows the profitability of a company, which could raise your taxes; after all, earnings were spent to purchase it.

But the good news is that when it is accurately accounted for, it can be deductible and actually help to lower taxes. Inventory falls under the expenses category until you actually sell or use it. There are different types of inventory eligible for deduction. For example, depreciated inventory and full valued inventory such as materials/supplies inventory are eligible.

Take a good look around your office and warehouse. It is very important that you take an accurate count. Never underestimate or over inflate the value of your inventory.

Qualifying Inventories

There are different schedules used by the IRS to determine the value of inventory items. Some inventory is given full value for the deduction, while others come under a depreciated schedule. Here is a list of items (though not limited to) that you can legitimately include in your inventory:

-- Material supplies: This includes a complete count of everything you sell to your customers.

-- Work equipment: All large equipment and small hand tools used to perform services provided. Though considered an asset, equipment is accounted for every year and the value is depreciated. The depreciation schedule is set and approved by the IRS.

-- Fleet vehicles: This is also an asset where the value is depreciated on a sliding scale each allowed year.

-- Office equipment: More depreciated assets: desks, phones, chairs, floor mats, file cabinets, fax machines, copiers, postage machines, computers, scanners, etc.

-- Office supplies: Pens, pencils, copy paper, ink cartridges, file folders, desk calendars, etc.

-- Maintenance supplies: Oil, oil filters, parts, gasoline (if kept at the warehouse), etc.

Considerations

Do you really need to count every single thing? Yes, everything has a value, even that old computer you wish you could replace. (Be sure to have your accountant refer to the IRS schedule for allowed depreciation.)

Caution: As tempting as it might be, if you overinflate the value of your inventory and find yourself going through a tax audit, if discrepancies are found, there will be fines/penalties and interest charged. You will pay more in taxes than you would have in the first place.

Resources

• IRS website