No matter how big or small a business, lost inventory is a challenge every company faces. All it takes is a simple human error in stocking or tracking or even a glitch within your inventory supply management procedures and suddenly that stock you know you have somewhere is suddenly impossible to find. So how can you keep this from meaning big losses in overall earnings? We have a few ideas.
Inventory reduction — a fancy way of saying it’s lost for good — can be used to lower your taxes. Simply use the loss to adjust your cost of goods sold, called COGS. COGS are taken away from your company’s gross income, adjusting your taxable amount earned.
The Paperwork Option
If you don’t want to mess around with figuring out how it affects your COGS, you can also use IRS Form 4684, Casualties and Thefts. Don’t let the name put you off, as losing stock is considered a casualty. You’ll still need to hunker down with your accountants to hammer out the numbers but this, too, can lower your taxable corporate income.
What Happens If You Find the Stuff?
Of course, there’s always the chance you’ll uncover this lost inventory somewhere down the line. So what do you do if shifting a pallet in the back corner of your warehouse reveals the stock you were sure you lost three years ago? If you’ve already gone through the process of reporting it as a loss with your taxes, you’ll need to go back and readjust based on either the original market price or the current market price. Figure out which leaves you better off then strategize with marketing on the best way to move the overstock quickly.
Lost inventory is never easy to deal with but there are ways to make the loss less of a burden. Working to use the loss to bring down your taxable income can help to offset some of the damage but, of course, the real key is to have an inventory supply management system in place that prevents lost inventory as often as possible.