Inventory - Business closed - write off

[ILLMAS]

I have a client who sold at a swap meet or flea market for many years. In 2024, he decided to close his shop (no sales in 2024) and was left with approximately $100K in unsold inventory. Additionally, he inherited a property along with his siblings back in 2011, and they all decided to sell the property in 2024. The step-up basis is very low, meaning his portion of the sale results in almost a 100% gain. My question is: Can he write off the unsold inventory to offset part of the gain from the property sale? The best option for the unsold inventory would be donating it to Goodwill or Salvation Army.

Thanks!

[Lee B]

 

It might make more sense for him to contact some of the other flea market participants and sell his inventory for 20 or 30 cents on the dollar

which would generate a useable NOL assuming he is a sole propprietor.

[ILLMAS]

Agreed, these are cowboy suits that were fashionable in the 90's and over the last 30 years he sells one here and there, but I will make that suggestion.

 

Thanks

[Lion EA]

Sell to a costume company, theater, that kind of thing.

[DANRVAN]

1 hour ago, ILLMAS said:

suits that were fashionable in the 90's and over the last 30 years he sells one here and there,

Sounds like obsolete inventory which needs to scrapped and written off; ending value = zero.

 

[kathyc2]

Zero sales and 100K loss may raise a flag.  Make sure you have good documentation.

If the inventory is indeed worthless, how would there be a value of donating it?

[Max W]

Cowboy suits may not be popular in CT, but they are popular in rural ares, especially in the western states.   The client is leaving a lot of money on the table if he doesn't try to sell them.   He could try the costume shops in L.A. such as Western Costume, then places like Las Vegas, Denver, Dallas and SLC.

There is also Ebay, or have his own web site.

[ILLMAS]

Thank you all for your contributions. I would like to clarify that the suits in question are actually western wear, not technically cowboy suits. However, as city slicker, we do not perceive a significant distinction between the two. In fact, I personally owned cowboy boots during the 1990s when they were a fashionable trend.

[DANRVAN]

On 3/22/2025 at 8:49 AM, kathyc2 said:

  Make sure you have good documentation.

 

On 3/21/2025 at 3:34 PM, ILLMAS said:

have a client who sold at a swap meet or flea market for many years.

So it should be well established by now that activity is a trade or business;  but a good time to review and document the 9 factors.

In regards to factor six, one of my favorites cites:  "Abandoning an activity after indications that the activity will be unprofitable signifies that the taxpayer engaged in the activity for profit. Canale v. Commissioner, T.C. Memo. 1989-619" 

That came from Morrissey, John E., et ux. v. Comm.  famous case of full time banker and weekend drag racer.

[kathyc2]

By documentation I was referring to documenting the cost of inventory.  Unless client kept full books including balance sheet, it may be difficult. 

One way may be to take average purchase cost over last couple years with receipts.   Say average cost was 50, which would mean 2,000 suits.  If you assume hanging is six suits to a foot, that would work out to 300+ linear feet.  Have client take picture to document their claim. 

[DANRVAN]

2 hours ago, kathyc2 said:

documenting the cost of inventory

That is reconciled on a yearly basis with Schedule C through cost of sales. 

OP has filed the returns for many years so should be comfortable with inventory numbers.

I agree it would be helpful to document the physical disposal, sounds like a dumpster full.  It is hard to imagine $100,000 of used clothing hauled around to swaps and flea markets, but I really have no idea and that is not the point of OP discussion.

 

[kathyc2]

Unless client keeps full books with balance sheet, what is being reconciled on COS?  Info client provides?  Does client understand how inventory and COS works?  Does client take a full inventory at year end every year and provide it to preparer?

If pulled for audit, you don't think IRS would want some documentation as to cost for write off?  

From info provided here, it doesn't pass the smell test.  Simply provided some ideas to OP as how to CYA.  If audited depending on facts and circumstances there may be an attempt to invoke 6694 penalties.

 

[DANRVAN]

42 minutes ago, kathyc2 said:

  Does client understand how inventory and COS works?  

That should have been established over the many years the preparer has worked with the client.

The 12/31/23 inventory is an accumulation of purchases less COS over the years.  

If purchases have been correctly accounted for over the years, the 12/31/23  inventory could only be overstated if COS has been understated in the past; which means income has been overstated in the past.

OP has not expressed any concerns about inventory value. 

 

[Lee B]

On 3/23/2025 at 9:47 AM, ILLMAS said:

Thank you all for your contributions. I would like to clarify that the suits in question are actually western wear, not technically cowboy suits. However, as city slicker, we do not perceive a significant distinction between the two. In fact, I personally owned cowboy boots during the 1990s when they were a fashionable trend.

I am curious what your client and you decided to do

[Corduroy Frog]

Whatever happened to the concept of LOCOM?  (Lower of Cost or Market).  If it had been applied consistently, this inventory should have been largely written off over a period of years - not just written off as a huge loss in one fell swoop.

[DANRVAN]

26 minutes ago, Corduroy Frog said:

(Lower of Cost or Market)

It is not required for tax purposes. It is obvious taxpayer has not elected to use it and probably not practical for this business.

 

26 minutes ago, Corduroy Frog said:

this inventory should have been largely written off over a period of years

That is only your opinion only, after the fact.