Many sellers wait until tax season to think about unsellable inventory, and by then the paperwork trail has gone cold. An inventory write-off is deductible when you can prove the stock is worthless, damaged, or unsellable, and remove it from your books at the correct cost. Getting there requires knowing which losses qualify, how to value them, where to record them, and what proof to keep.
In this guide, you’ll learn which inventory losses the IRS allows you to deduct, how to calculate the loss using landed cost instead of guesswork, and how to record the adjustment in QuickBooks Online without distorting your margins.
When Does Unsellable Stock Qualify for a Deduction?
Not every slow-moving SKU qualifies for a write-off, but damaged, expired, lost, or stolen inventory almost always does. The IRS allows a deduction when inventory has no remaining value to your business, and you can prove that with records.
The general rule is simple: if the inventory is worthless or its value has dropped below what you paid, you can adjust your books to match reality. That adjustment becomes a deduction against your taxable income for the year the loss occurred.
Damaged, Spoiled, and Expired Products
Physically damaged goods are the clearest case for a write-off, especially for sellers with perishable or fragile SKUs. A skincare brand with 400 units past their expiration date has a straightforward loss to claim.
The key is documenting the condition before disposal. A photo, a warehouse damage report, or an Amazon Seller Central case number all support the claim.
Obsolete SKUs and Dead Stock
Dead stock qualifies for a write-off once you can show it has no reasonable path to sale. A seasonal product from two years ago sitting at 15% of its original retail price is a candidate.
Aged inventory reports inside Seller Central or your 3PL dashboard help identify these SKUs before they sit for another full year. Reviewing this quarterly, rather than only at year-end, keeps the deduction timely and defensible.
FBA Warehouse Losses, Removals, and Reimbursements
FBA warehouse losses happen more often than most sellers realize, and Amazon does not always catch every discrepancy automatically. If Amazon loses or damages your inventory, check the Reimbursements report inside Seller Central before writing anything off.
Amazon may already have reimbursed you at your declared value, which changes the accounting treatment entirely. If Amazon didn’t issue a reimbursement, the loss becomes a straightforward write-off against COGS.
Theft, Shrinkage, and Unexplained Quantity Variances
Shrinkage and theft losses are deductible, but they require a paper trail showing you investigated the variance. A 3PL warehouse showing 50 units missing during a cycle count is a common example.
Compare your physical count to your last confirmed inventory ledger balance, document the gap, and then adjust your books. Once you know which losses qualify, the next step is calculating exactly how much they are worth.
Determine the Loss Amount Before You Adjust the Books
The dollar amount you write off isn’t the price on your supplier invoice, and getting this wrong can overstate or understate your deduction. Sellers who use the wrong cost basis often end up correcting their books twice, once during the year and again at tax time.
Getting the valuation right the first time keeps your P&L accurate and keeps your CPA from having to unwind bad entries later.
Use Landed Cost Rather Than the Supplier Invoice Price
Landed cost includes the unit price plus freight, duties, and inbound fees, and it is the number you should use for any write-off. A $4 unit cost from your supplier might carry a true landed cost closer to $6.50 once freight and tariffs are added.
Using only the invoice price understates your loss and unnecessarily shrinks your deduction. Every write-off entry should trace back to the landed cost figure sitting in your inventory ledger, not the purchase order.
Apply FIFO or Weighted-Average Cost Consistently
Your costing method determines which units get written off and at what value. FIFO assumes your oldest inventory sells first, while weighted-average blends all purchase costs into a single per-unit figure.
Switching methods mid-year to produce a bigger deduction creates inconsistency that auditors notice quickly. Pick one method, document it, and apply it consistently across every SKU and every write-off event.
Separate a Partial Write-Down From a Full Write-Off
A write-down reduces inventory value when it is worth less than you paid, while a full write-off removes it from your books entirely. Consider these two scenarios side by side:
- Write-down: 200 units of a discontinued color variant now sell at $3 instead of $12, reducing carrying value.
- Write-off: 200 units damaged in a warehouse fire have zero recoverable value and are removed completely.
Confusing the two overstates or understates your COGS for the period.
Account for Recoverable Value From Liquidation or Salvage
If you can liquidate damaged stock through a salvage buyer, that recovered amount reduces your total loss. Selling 500 units of damaged inventory for $1,200 through a liquidator means you write off only the remaining loss.
Recording the salvage sale separately from the write-off keeps both transactions clean in your books. With the loss amount calculated correctly, the next step is getting it recorded properly in your accounting system.
Record the Adjustment in Your eCommerce Accounting System
How you record a write-off in QuickBooks Online determines whether your financial statements accurately reflect your margins. A misplaced entry can quietly inflate your reported profit for months before anyone notices.
Getting the mechanics right matters more for sellers running multiple channels, where inventory data flows in from several sources at once.
How a Write-Off Flows Through Inventory and COGS
A write-off debits an expense or COGS account and credits your inventory asset account, lowering both inventory value and reported profit for the period. A $9,000 write-off on damaged units reduces your balance sheet inventory by $9,000 and increases your COGS by the same amount.
This is the standard journal entry pattern used across accrual-basis eCommerce accounting. Skipping this step keeps phantom inventory value on your books that no longer exists.
Reconcile Seller Central Adjustments and FBA Reimbursements
Amazon’s own inventory adjustment reports inside Seller Central rarely match your internal accounting records automatically. A seller with $14,000 in FBA-reported losses might only have $9,000 confirmed through reimbursements, leaving a $5,000 gap to write off manually.
Running this reconciliation monthly, rather than waiting for year-end, prevents a backlog of unexplained adjustments. This habit becomes especially valuable once you start mapping settlement data into your books at scale.
Map Amazon Settlement Activity Through A2X and QuickBooks Online
A2X separates Amazon’s bundled settlement deposits into individual line items, including reimbursements, refunds, and inventory-related fees, before they hit QuickBooks Online. Without this mapping, a $22,000 Amazon deposit looks like pure revenue, even though it includes fee deductions and reimbursement credits.
Sellers using A2X to map these categories separately get a COGS figure that reflects true product cost, not a blended number distorted by fee noise.
Record Shopify Returns and Disposed Stock Without Distorting Margins
Shopify returns that result in disposed or unsellable stock need their own write-off entry, separate from the refund itself. A customer return of a damaged item should trigger a refund entry in your revenue accounts and a separate inventory write-off if you can’t restock it.
Bundling both into one generic “returns” line item hides the true cost of damaged goods from your P&L. With entries recorded correctly, the next priority is building a paper trail strong enough to survive an audit.
Build Documentation That Supports the Deduction
A write-off without documentation is a deduction the IRS can challenge and win. Sellers who keep organized records rarely face pushback, while those who rely on memory or vague notes often lose the deduction entirely during review.
Building this habit into your monthly close, not just your year-end process, keeps a defensible paper trail current.
Reports and Evidence Amazon Sellers Should Retain
Amazon generates several reports that support a write-off claim, and pulling them at the time of loss beats trying to reconstruct them later. Keep the following on file for every material write-off:
- Inventory Adjustments report from Seller Central
- FBA Reimbursements report showing what Amazon already covered
- Removal Order Detail report for disposed or returned units
- Case log correspondence with Amazon support regarding the loss
Documentation Shopify Owners Need for Damaged or Obsolete Goods
Shopify sellers need internal proof since the platform does not generate warehouse condition reports automatically. Photos of damaged stock, a written note from warehouse staff, and the original purchase order all support the claim.
A written disposal log noting the date, quantity, and reason for write-off strengthens the file further. This matters especially for donated inventory, where enhanced deductions under IRC 170(e)(3) can allow charitable donations of inventory to qualify for a bigger deduction than a standard write-off.
Create an Approval Trail for Material Inventory Adjustments
Any write-off above a set dollar threshold should require sign-off from an owner or finance lead before it hits the books. A $15,000 write-off approved by one person with no second review is a common audit flag.
Setting an internal threshold, such as any adjustment over $2,500 requiring written approval, creates accountability without slowing down small routine adjustments.
Match Physical Counts to Your Year-End Inventory Records
Your year-end inventory count should tie directly to the balance shown in QuickBooks Online, with any variance explained by a write-off entry. Even a mismatch of a few hundred units without explanation invites questions from a tax preparer or auditor.
Reconciling counts quarterly instead of once a year catches discrepancies while the details are still fresh. Once your documentation is airtight, the final step is making sure the deduction actually reduces what you owe.
Turn Inventory Losses Into Defensible Tax Savings
A properly recorded write-off lowers your taxable income for the year the loss occurred, not the year you originally bought the inventory. This timing detail catches many sellers off guard when they assume the deduction applies retroactively.
Businesses using accrual accounting reduce ending inventory value and increase COGS in the same period the loss is confirmed. For a seller with $80,000 in annual profit and a $12,000 legitimate write-off, that deduction can meaningfully lower the tax bill for the year, provided the loss is documented and recorded correctly.
Strategic write-off management also improves cash flow planning, since sellers who track these losses consistently avoid the year-end scramble of guessing what qualifies.
Sellers who wait until December to review a full year of dead stock often miss deductions simply because the paper trail has gone cold. Reviewing inventory health every quarter, alongside your COGS and margin reports, keeps this deduction available every year rather than a once-in-a-while windfall.
Before you finalize any inventory write-off, it is worth a second opinion from a CPA who works exclusively with eCommerce sellers.
Protecting Profit Starts With Clean Inventory Records
Unsellable inventory does not have to sit on your books as a silent drag on your reported profit. Once you know which losses qualify, calculate them using landed cost, and record the adjustment correctly in QuickBooks Online, you turn a frustrating operational problem into a legitimate deduction.
The sellers who handle this well treat inventory reviews as a routine part of their monthly close, not a scramble before their tax return is due. That habit alone protects more profit over time than any single write-off ever could.
If your inventory accounting has gaps, a short conversation can clarify exactly where you stand. Schedule a free strategy call with AMZ Accountant to review your current write-off process and find the deductions you may have already missed.
Frequently Asked Questions
Are inventory write-offs tax deductible for Amazon FBA sellers?
Yes, inventory write-offs are deductible when the stock is proven worthless, damaged, or unsellable and removed from your books at the correct cost. The deduction applies in the tax year you confirm the loss, not the year you originally purchased the inventory.
Can I write off inventory that does not sell on Amazon or Shopify?
Slow-moving inventory alone does not automatically qualify unless you can show it has no reasonable path to sale, such as a discontinued SKU or outdated seasonal product. Simply having unsold stock sitting in a warehouse is not enough without documentation showing its value has genuinely dropped.
How do Amazon FBA reimbursements affect an inventory write-off?
If Amazon already reimbursed you for lost or damaged inventory, that amount should offset your loss rather than being written off separately. Check the Reimbursements report in Seller Central before adjusting your books to avoid double-counting the loss.
Should an inventory write-off go to COGS or an operating expense?
Most inventory write-offs get recorded against cost of goods sold since the loss relates directly to product cost, not general business operations. This keeps your gross margin calculation accurate and reflects the true cost of the goods you sold or disposed of.
What records should I keep to support an inventory loss deduction?
Keep Seller Central adjustment reports, reimbursement records, photos of damaged goods, and any internal approval notes tied to the write-off. A clear disposal log with dates, quantities, and reasons for the loss gives you a defensible paper trail if the deduction is ever questioned.