Amazon FBA disposal inventory write-off taxes: IRS inventory rules

FBA units you hold for sale in the normal course of business are inventory (IRS: Publication 583). A unit Amazon disposed of or lost before year-end is not in your closing inventory. You must generally take inventories into account at the beginning and the end of your tax year, unless you are a small business taxpayer (IRS: Publication 334). A lost or damaged unit may also be a casualty or theft loss, which Publication 547 lets you deduct in one of two ways (IRS: Publication 547).

What counts as inventory for Amazon FBA disposal inventory write-off taxes

Inventories include goods held for sale in the normal course of business, says Publication 583, the IRS guide to starting a business and keeping records (IRS: Publication 583). FBA units you hold for sale fit that description. A unit Amazon has destroyed or lost is no longer on hand, so it drops out of your count. A unit a removal order sends back to you is still on hand; whether it remains goods held for sale depends on what you do with it.

Publication 334, the IRS tax guide for small business, sets the general duty to count them. It says that when “the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year, unless you are a small business taxpayer” (IRS: Publication 334). In plain words, an income-producing factor is part of how your business earns money. Fees are a separate topic, covered in whether Amazon fees are cost of goods sold.

What options a small business taxpayer has

A small business taxpayer has more choices. Publication 538, the IRS guide to accounting periods and methods, defines who qualifies. If you are a small business taxpayer, it says you “can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income” (IRS: Publication 538).

For a small business taxpayer that chooses not to keep an inventory, Publication 538 lists two options (IRS: Publication 538):

• “treating the inventory as non-incidental materials and supplies”
• “conforming to its treatment of inventory in an applicable financial statement”

If that taxpayer has no applicable financial statement, Publication 538 says it “can use the method of accounting used in its books and records prepared according to its accounting procedures.” If you are a small business taxpayer and choose to keep an inventory, you “generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold” (IRS: Publication 538).

Choosing among these options is an accounting-method decision. A CPA or enrolled agent can help you pick one and confirm how your method treats units that are disposed of rather than sold.

How to deduct an inventory casualty or theft loss

You can deduct a casualty or theft loss of inventory in one of two ways, and that includes items you hold for sale to customers (IRS: Publication 547). The rules come from Publication 547, the IRS guide to casualties, disasters and thefts. Whether a lost or damaged FBA unit counts as a casualty or theft loss depends on the facts, so ask a tax professional to apply Publication 547 to yours. The two ways:

• Through cost of goods sold. Publication 547 describes deducting the loss “through the increase in the cost of goods sold by properly reporting your opening and closing inventories.” Cost of goods sold is the figure your opening and closing inventories feed into. If you take the loss this way, don't claim it again as a casualty or theft loss.
• As a separate deduction. If you deduct the loss separately, Publication 547 says to “eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases.” In plain words, the affected items come out of your cost of goods sold.

Publication 547 also addresses reimbursements under each way. If you take the loss through the increase in the cost of goods sold, “include any insurance or other reimbursement you receive for the loss in gross income” (IRS: Publication 547). If you deduct the loss separately and the reimbursement hasn't arrived by the end of the year, you may not claim the part of the loss you have a reasonable prospect of recovering.

If Amazon pays you for a lost or damaged unit, ask your tax professional whether these rules reach that payment. They are written for casualty or theft losses of inventory.

What the 30-day offering rule requires

The rule requires an actual offer of the goods for sale. The federal regulation on valuing inventories (26 CFR §1.471-2) says: “Bona fide selling price means actual offering of goods during a period ending not later than 30 days after inventory date” (Cornell LII: 26 CFR §1.471-2). Bona fide means genuine. So a selling price is bona fide only if you actually offered the goods during that window.

This offering test is one condition of a valuation basis that covers only certain exceptional goods. The regulation puts the burden of proof on you. As the taxpayer, you must show that goods valued on this selling basis come within its classifications (Cornell LII: 26 CFR §1.471-2).

If you are weighing this basis for damaged FBA units, read the classifications and the valuation method in the full regulation with a CPA or enrolled agent. Keep the evidence of the offer, with its dates, in your records.

What records support your inventory numbers

Two texts set the standard for inventory records. The regulation says inventories “should be recorded in a legible manner, properly computed and summarized, and should be preserved as a part of the accounting records of the taxpayer” (Cornell LII: 26 CFR §1.471-2). Publication 538 adds that purchase records should show the firm name, date of invoice, invoice cost, and retail selling price (IRS: Publication 538).

Four record-keeping steps drawn from the rules above:

1. Keep purchase invoices and related purchase records. Together they should show the firm name, invoice date, invoice cost and retail selling price.
2. Record inventory in a summarized form. If the general Publication 334 rule applies to you, do it at the beginning and the end of the tax year. Preserve the figures with your accounting records.
3. Note each inventory loss and how you deducted it. For a casualty or theft loss, write down whether it went through cost of goods sold or was deducted separately, so it is claimed only once. Note any reimbursement too.
4. Save proof of any selling-price offer. If you use the selling-price basis, keep the offer and its dates, because the burden of proof is yours.

Quick answers

Is a reimbursement for an inventory loss income?

For a casualty or theft loss of inventory taken through cost of goods sold, yes. Publication 547 says to include any insurance or other reimbursement you receive for the loss in gross income (IRS: Publication 547). For a loss you deduct separately, Publication 547 sets a limit on the loss itself. If the reimbursement hasn't arrived by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. That limit is about the deduction, not about the payment; for how a reimbursement is treated under the separate route, ask your tax professional.

Can I deduct an inventory loss both ways?

No, according to Publication 547. If you take a casualty or theft loss of inventory through cost of goods sold, don't claim it again as a casualty or theft loss (IRS: Publication 547). If you deduct it separately instead, eliminate the affected items from cost of goods sold with a downward adjustment to opening inventory or purchases. Record which way you used.

Who has to prove goods qualify for the selling-price basis?

You do. Under 26 CFR §1.471-2, the burden of proof rests on the taxpayer to show that exceptional goods valued on the selling basis come within the regulation's classifications (Cornell LII: 26 CFR §1.471-2). The price must also be bona fide. That means an actual offering of the goods during a period ending no later than 30 days after the inventory date. Keep the evidence of that offer with your records.

Do I have to keep an inventory at all?

Publication 334 says that when buying or selling merchandise is an income-producing factor, you must generally take inventories into account at the beginning and the end of your tax year, unless you are a small business taxpayer (IRS: Publication 334). A small business taxpayer can choose not to keep an inventory but must still use an inventory accounting method that clearly reflects income (IRS: Publication 538). A tax professional can help you choose.

Where Taxller fits

Upload your Amazon settlement reports and Taxller turns them into double-entry books: sales, fees, refunds and payouts, split per payout. Our free tax calendar lists the federal deadlines for sellers and the state deadlines for 18 states, with weekend shifts applied and sources cited. Taxller never files or pays anything on your behalf: you or your accountant review and file.

Sources

• Publication 583, Starting a Business and Keeping Records
• Publication 334, Tax Guide for Small Business
• Publication 538, Accounting Periods and Methods
• Publication 547, Casualties, Disasters, and Thefts
• 26 CFR § 1.471-2 Valuation of inventories