Sometimes you just want or need to walk away from your business assets…they aren’t productive anymore, you can’t sell them, or you can’t continue making payments on loans used to finance their purchase. What does this mean from a tax perspective? It depends on the property and your actions.
- What to do with them physically. Depending on what the items are, you may be able to sell them in bulk to a remainder company or donate them to a charity. Otherwise you can simply throw them out.
- What to do with your financial statements. You’ll need to remove them from your balance sheet. And you should adjust your income statement.
- What to do for taxes. You can take an immediate tax deduction for a write-down of inventory that’s become obsolete. You don’t even have to scrap the item but you must offer it for sale at the write-down price for at least 30 days after the inventory date. (This write-down option doesn’t apply if you use LIFO to value your inventory.) Note: If you donate food inventory that’s still wholesome to a qualified tax-exempt organization, there’s a special deduction rule that may give you a tax break. For C corporations, donations of any inventory for the care of the ill, the needy, or infants, are also eligible for a special write-off rule. Find information in IRS Publication 526.
If you sell the item, you may have a gain even though you receive very little. The reason: it’s likely that you wrote-off the cost through the Section 179 deduction (first-year expensing), bonus depreciation, and/or regular depreciation.
If you donate the item, you may not receive any charitable contribution deduction, but check the IRS publication listed earlier.
If you throw away the item, you still may have to “recapture” (report some income) from the Section 179 deduction you claimed when you bought it (see IRS Publication 946.
- If you voluntarily convey the property in lieu of a foreclosure, this isn’t treated as an abandonment. Instead it’s treated as an exchange of the property to satisfy the debt; gain or loss results.
- If you abandon property that’s secured by a debt for which you’re personally liable, no gain or loss results until a foreclosure is completed. You’ll also have cancellation of debt income equal to the canceled debt.
- If you abandon property with non-resource debt (you aren’t personally liable for it), the abandonment is treated as a sale or exchange.
For more information, see IRS Publication 544.