How to Deduct Inventory When You Close a Retail Store

Closing a retail business is a lot of work. You have to collect accounts receivable, settle debts, wrap up your taxes and dispose of your business assets. With a retail store, those assets include inventory. Your options include selling it, donating it to charity or turning it over with the store to a new business owner. Each path has a different tax effect.

The simplest way to get rid of your inventory is a going-out-of-business sale. Whatever you sell counts as income on your final business tax return. That usually works out better for you financially than taking a charitable write-off, even if you have to sell at a loss. After you've finished selling, calculate the cost of goods sold for the year: Subtract your ending inventory from the starting inventory and the inventory you bought during the year. You write off the cost as a business expense.

You may be able to write off any inventory you can't sell by donating it to a charity. If you carried over the inventory from a previous year, you can claim a deduction at the market value or the purchase price, whichever is lower. If you bought the inventory in the current year, you include the purchase price in the cost of goods sold rather than deducting it separately. You have to give to a charity that can accept tax-deductible donations to gain the write-off.

Instead of simply closing your doors, you may be able to sell the entire business to someone else, including the inventory. Figuring taxes in this case takes some extra number crunching, because you have to allocate the payment to different assets, such as inventory, equipment and goodwill. Allocation is important because, while the sale of inventory generates ordinary income, selling assets produces capital gains, which offer a lower tax rate. The more you can allocate away from inventory, the lower your tax on the sale.

You report the final gain or loss from your business on the same forms as usual. For a sole proprietorship, that's Schedule C; for a partnership, you use Schedule E. If you're donating any assets or inventory, you don't report the donation as a business expense. Instead you use Schedule A, reporting it as an itemized personal deduction. You need either Internal Revenue Service Form 4797 or 8954 in addition to your regular tax paperwork if you're reporting the sale of your business.