Inventory Write-Downs and Write-Offs: How to Handle Dead Stock

A box of last season’s stock is sitting in the warehouse; it isn’t going to sell at full price, and it’s still on your books at what you paid for it. Carried there, it overstates your assets and your profit.

Here’s how to write inventory down to what it’s really worth, when to write it off completely, and how the tax side differs.

What’s the difference between an inventory write-down and a write-off?

An inventory write-down reduces the recorded value of stock to what it’s now worth, when that’s less than you paid for it. An inventory write-off removes the value entirely, when the stock is worth nothing at all. A write-down is a partial markdown on the books; a write-off is the full removal.

Both come down to one idea: the inventory on your books should never be worth more than it can bring in. A carrying value is the amount a SKU is recorded at, usually what it cost you. When last season’s stock will only move at a clearance price, you write it down to that price.

When damaged returns come back unsellable, or a pallet is destroyed or stolen, there’s nothing to recover, so you write it off in full. Stock that’s stopped selling at a normal pace or price is what people mean by obsolete, or dead, stock.

Table 1. Inventory write-down vs write-off.

Aspect	Write-down	Write-off
What happens	Value reduced to net realizable value	Value removed entirely
When you use it	Stock is worth less than cost but still sellable	Stock is worthless: destroyed, stolen, or unsellable
Ecommerce example	A last-season SKU marked to its clearance value	Damaged returns Amazon can’t refulfill; destroyed stock
The entry	Debit loss or COGS; credit inventory (or a reserve)	Debit loss or COGS; credit inventory (or clear the reserve)
Tax deduction	Only once sold below cost	Only once disposed: sold, donated, or destroyed

When do you write inventory down? The lower of cost and net realizable value rule

You write inventory down whenever its net realizable value drops below what it cost, because GAAP makes you carry inventory at the lower of the two. Net realizable value is the price you can realistically sell a unit for, minus what it costs you to sell it.

Say a jacket cost you $40, but it’s now moving only at a $30 clearance price, and it runs about $4 to pick, pack, and ship. Its net realizable value is $26, below the $40 you paid, so you write it down by $14 a unit. Do that across the units on hand and the total is your write-down.

A few things push value below cost: a SKU goes obsolete, a version gets superseded, goods are damaged, a category floods and prices fall, or dated stock nears expiry. Whatever costing method you use to set the original cost, the lower-of-cost-and-net-realizable-value rule sits on top of it.

Businesses on LIFO or the retail method apply a slightly different lower-of-cost-or-market test, but the idea is the same.

The timing is the part sellers get wrong. You write the stock down as soon as you know it’s impaired, not when you finally clear it, because the books are meant to reflect what you own right now. And under US GAAP, once you’ve written a value down, you don’t write it back up if the market recovers.

Leaving it at cost doesn’t just flatter your balance sheet. It overstates the profit you report, which can mean tax on income you never really earned and a misleading picture for any lender or buyer reading your numbers.

Your books should never value stock above what it can sell for. If inventory sits at cost while its real worth has dropped, your assets and your profit are both overstated, and the fix is a write-down, or a write-off if it’s worth nothing.

How do you record an inventory write-down?

You record a write-down with a single entry: debit a loss (or cost of goods sold) and credit inventory, for the amount the value has dropped. The debit is the expense that hits your P&L, and the credit lowers the asset on your balance sheet.

There are two ways to do it. The direct method posts the loss straight against inventory, which suits a one-off. The reserve method, sometimes called the allowance method, books the loss to an obsolescence reserve now, a contra-asset that offsets inventory, and clears that reserve against inventory later when the stock is sold, donated, or scrapped.

The reserve method fits a business that expects some obsolescence every period and wants to spread the hit rather than take it in lumps.

You can send the debit to cost of goods sold or to a dedicated loss on obsolete inventory account. The separate account keeps the hit visible and out of your core margin, which is worth doing once the amounts get large. With the reserve method, you also true the reserve up or down each period as your read on what won’t sell changes.

Say a SKU cost you $120,000 and its net realizable value has fallen to $100,000. That’s a $20,000 write-down, recorded like this.

Table 2. The $20,000 write-down recorded both ways.

Method	Account	Debit	Credit
Direct method	Loss on inventory write-down	$20,000
Direct method	Inventory		$20,000
Reserve method (record now)	Loss on inventory write-down	$20,000
Reserve method (record now)	Allowance for obsolete inventory		$20,000
Reserve method (on disposal)	Allowance for obsolete inventory	$20,000
Reserve method (on disposal)	Inventory		$20,000

When a write-down becomes a full write-off

When stock is worth nothing, damaged beyond sale, destroyed, stolen, or truly unsellable, you write it off instead of down, removing its full cost rather than marking it lower.

The entry has the same shape as a write-down, a debit to a loss or cost of goods sold and a credit to inventory, or you clear the reserve you’d built, but it’s for the whole cost this time.

The common triggers for a store are unfulfillable or damaged returns Amazon can’t put back in stock, spoilage or expiry, a discontinued SKU with no buyer, and stock lost to theft or a miscount.

For anything you physically destroy, keep documentation, a record of what it was and proof it’s gone, since that’s what supports the write-off later.

One Amazon wrinkle is worth catching: when Amazon reimburses you for units it loses or damages in its own warehouses, that reimbursement is income that offsets the loss. Net it against the write-off rather than booking the full cost as a loss and the reimbursement somewhere else.

Where write-downs and write-offs land on your statements

A write-down or write-off shows up in two places at once. The inventory line on your balance sheet drops, and an expense hits your P&L, which pulls down gross margin and operating income.

Where the expense sits depends on size. A small, routine write-down usually rides inside cost of goods sold. A large or unusual one is better broken out on its own line, an inventory write-down or a loss on obsolete inventory, so it doesn’t quietly distort your gross margin trend and hide a real shift in your unit economics.

A write-off is the cleanest case of inventory becoming an expense without a sale ever happening. It’s the same asset-to-expense move that cost of goods sold makes on a normal order, triggered by obsolescence instead of a customer.

Recording it keeps the profit you report honest and your margins readable.

Can you deduct an inventory write-down on your taxes?

Not right away. For your books, you record the write-down as soon as the stock loses value. For taxes, the IRS only lets you deduct the loss once you’ve disposed of the inventory, by selling it, donating it, or destroying it.

There are three ways to dispose of it, each with its own treatment. You can sell it, to a liquidator or through a discount channel, and take the loss against cost. You can donate it, a charitable route that can carry an enhanced deduction for inventory given to a qualifying cause.

Or you can destroy it, the most paperwork-heavy option, where you keep before-and-after records to back the deduction.

An estimate alone won’t get you there. A reserve you book by judgment lowers book profit but isn’t deductible; only the actual disposal is.

The gap matters for planning: flagging stock as obsolete lowers your reported book profit in the period you flag it, but the tax deduction lands in the period you dispose of it, so the two rarely fall in the same year.

The treatment also varies by how and where you sell, so check your own situation with an accountant.

Table 3. Book vs tax: when the loss counts.

	Book (GAAP)	Tax (IRS)
When it counts	When you determine the stock is impaired or obsolete	Only when the inventory is disposed of
What you do	Write down to net realizable value, or write off	Sell, donate, or destroy the stock
Effect	Lowers reported profit in that period	Deduction lands in the period of disposal
Watch	Required under lower of cost and NRV; no write-back up	Keep documentation; treatment varies, confirm with a CPA

A write-down is a book entry, not a tax deduction. Flagging stock as obsolete lowers your reported profit now, but you can’t deduct it for tax until you’ve sold, donated, or destroyed it, so the book loss and the tax deduction fall in different periods.

Handle dead stock before it becomes a write-off

The cheapest write-off is the one you avoid, so the real win is catching dead stock while it can still be sold. Spot it early from an inventory aging report and days inventory on hand, both of which flag SKUs that have stopped moving long before year-end.

A common rule of thumb is stock with no sale in 90 to 180 days, or more than a year of supply sitting on hand, though the right line depends on your category.

Once you’ve found it, you’ve got options short of a write-off: discount it, bundle it with a strong seller, liquidate it, return it to the supplier if your terms allow, or donate it.

Any of those beats holding stock that’s only losing value. The write-down or write-off just records whichever path you pick.

The finance discipline behind it is small. Carry an obsolescence reserve so the hit is spread and predictable instead of a lumpy year-end surprise, which is part of keeping your ecommerce bookkeeping honest month to month.

And watch the cash tied up in stock that isn’t moving, since that’s the real cost of letting dead stock sit. Deciding early almost always beats writing off later.

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