Writing Off Unsold Inventory on Schedule C: Dead Stock, Damaged Goods and Clearance Write-Downs (2026)

Published: October 12, 2026 · Reading time: 12 min

TL;DR: If you sell goods and keep an inventory on Schedule C, unsold stock is not a deduction. It sits in closing inventory at cost until it sells. The exception is dead stock. Treasury Regulation 1.471-2(c) says goods that are unsalable at normal prices because of damage, imperfections, shop wear, changes of style, odd or broken lots or similar causes are valued at bona fide selling prices less direct cost of disposition, which lowers Line 41 and raises Cost of Goods Sold. A bona fide price means an actual offering within 30 days after the inventory date (January 30, 2027 for a December 31, 2026 count), and the burden of proof is yours. A write-down moves a deduction between years; it does not create a permanent loss. Throwing goods away, donating them and losing them to theft each follow a different path. In the worked example, a seller writes down $3,100 of dead stock to $900, which cuts 2026 net profit to $44,590.00 and total federal tax by $507.13.

Every product seller ends a year with a shelf of mistakes. The candle jars with a hairline crack. The mugs printed with the wrong glaze. Last season's pattern that nobody will buy at full price. You paid real money for them, and it is tempting to write the whole pile off in December.

The tax rule is more specific than that, and it is more generous than most sellers expect, because it gives you a way to deduct part of the loss now without waiting for a sale. This guide covers when the write-down applies, how to prove it, and what to do when the goods are thrown out, donated or stolen instead.

Why Unsold Stock Is Not a Deduction

The Schedule C instructions say: "In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year." Cost of Goods Sold in Part III is a subtraction: beginning inventory plus purchases, minus what is left at year-end. Goods still on the shelf are what is left, so their cost is not deducted until they sell. The mechanics are in Schedule C Part III and inventory receipts for resellers.

That is why dead stock hurts twice: you paid for it, and the return gives you nothing for it while it sits there.

If you do not keep an inventory

The instructions give small businesses a path out: "If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income." One accepted method treats inventory as nonincidental materials and supplies, deducted in the year the items are first used or consumed. The write-down below is a rule for people who keep an inventory. If you are on the materials-and-supplies method, ask your preparer how unsold items that you scrap are treated. See COGS versus supplies.

The Write-Down Rule for Goods You Cannot Sell

Treasury Regulation 1.471-2(c) carves out a class of goods from the ordinary cost rule. It covers "unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes." Those goods "should be valued at bona fide selling prices less direct cost of disposition, whether subparagraph (1) or (2) of this paragraph is used." Subparagraph (1) is cost and subparagraph (2) is the lower of cost or market.

Publication 538 says the same thing in plain words: "You should value these goods at their bona fide selling price minus direct cost of disposition, no matter which method you use to value the rest of your inventory."

Three points follow from the text.

1. You do not have to change methods. A seller who checks the Cost box on Line 33 still applies this rule to the damaged goods. It is a valuation rule for a class of goods, separate from the choice between cost and cost-or-market. See Lines 33 and 34.
2. The test is the goods, not your expectations. The regulation lists damage, imperfections, shop wear, changes of style and odd or broken lots, then "other similar causes." Goods that are merely slow but priced at normal prices are not on that list.
3. The value is a price minus a cost. You subtract the direct cost of disposition, such as marketplace fees and shipping you would incur to move the goods.

What Counts as a Bona Fide Selling Price

The regulation defines it in one sentence: "Bona fide selling price means actual offering of goods during a period ending not later than 30 days after inventory date."

Do the date math from your inventory date, usually December 31. The offering period must end no later than January 30, 2027 for the 2026 year. You do not have to sell anything by then, but you have to have actually put the goods on offer at the lower price.

So a clearance listing, a marked-down tag or a bin with a sign and a date is evidence. A number in a spreadsheet that you think the goods might fetch is not.

The burden of proof is yours

The regulation is blunt: "The burden of proof will rest upon the taxpayer to show that such exceptional goods as are valued upon such selling basis come within the classifications indicated above, and he shall maintain such records of the disposition of the goods as will enable a verification of the inventory to be made."

Treat that as a recordkeeping checklist:

• The purchase invoice that shows what each lot cost
• A dated photo of the flaw or damage
• The year-end count by item
• The listing or tag that shows the lower price and the date it was offered
• A note of the selling fees and shipping you counted as direct cost of disposition
• A record of what later happened to the goods

Publication 538 also says: "You must take a physical inventory at reasonable intervals and the book amount for inventory must be adjusted to agree with the actual inventory." See how long to keep receipts.

What the Write-Down Does Not Buy You

Relief provisions are usually read more broadly than they were written. This one deems less than people assume.

The line between "damaged or out of style" and "I overbought" is a facts question. Show your preparer the photos and the listings, not just the totals.

Four Things You Can Do with Dead Stock

The same $3,100 lot can end up four different ways, and each has a different tax result. The table uses the cost of the lot and a $1,200 clearance price in the worked example below.

Throwing it out

If the goods are gone, a physical count at year-end leaves them out of closing inventory. Publication 538 requires that the book amount for inventory be adjusted to agree with the actual inventory, so the cost flows into Cost of Goods Sold without a separate line. The risk is proof. Photograph the goods, note the date and quantity, and keep the invoices, because the regulation expects you to keep records of the disposition of the goods that let your inventory be verified.

Donating it

Publication 526 splits donated inventory in two. If the goods were in your opening inventory, "the amount you can deduct is the smaller of its FMV on the day you contributed it or its basis," and "You must remove the amount of your charitable contribution deduction from your opening inventory. It isn't part of the cost of goods sold." If they were not: "If the cost of donated inventory isn't included in your opening inventory, the inventory's basis is zero and you can't claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year."

For goods bought in 2026 and given away in 2026, that is a quiet advantage: the cost lands in Cost of Goods Sold on Schedule C, with no need to itemize. For older goods, the charitable deduction is a Schedule A item, because Publication 526 says: "Generally, to deduct a charitable contribution, you must itemize deductions on Schedule A (Form 1040)." The new non-itemizer charitable deduction is limited to cash gifts, so it does not help with goods. Publication 526 has a separate rule for food inventory. See the charitable donations guide.

Losing it to theft or a disaster

Publication 538 treats inventory losses differently from a bad guess: "You claim a casualty or theft loss of inventory, including items you hold for sale to customers, through the increase in the cost of goods sold by properly reporting your opening and closing inventories. You cannot claim the loss again as a casualty or theft loss." Any insurance or other reimbursement you receive is taxable, and you can instead choose to claim the loss separately if you adjust opening inventory or purchases so the items are not counted twice. For a federally declared disaster, Publication 538 lets you choose to deduct the loss on the prior year's return. See casualty and theft losses on business property.

Worked Example: A Candle and Home-Goods Seller, 2026

Dana is single, with no dependents and no other income. She sells candles and home goods online from a spare room. She keeps an inventory, checks the Cost box on Line 33 and uses the cash method for everything else. She has no employees and no qualifying vehicle expenses to report here.

At her December 31, 2026 count, her inventory at cost is $11,900. Within it is a $3,100 lot: candle jars with hairline cracks, mugs with a misprinted glaze and last season's discontinued pattern. These are imperfections and a change of style, two of the listed causes. She photographs them, then lists the whole lot at clearance prices that she expects to bring $1,200 in total. She expects $300 of marketplace fees and shipping to move the lot. The listings go live on January 4, 2027, well inside the January 30 window.

Valuing the lot. $1,200 minus $300 of direct cost of disposition is $900. The other $8,800 of goods stays at cost. Closing inventory is $8,800 plus $900, or $9,700.

The write-down raises Cost of Goods Sold by $2,200, which is the $3,100 cost minus the $900 value.

Her other expenses (the same in both columns).

Net profit is $60,400 minus $15,810, or $44,590.00 with the write-down, against $46,790.00 without it.

Self-employment tax. With the write-down, 92.35% of $44,590.00 is $41,178.87, well below the 2026 Social Security wage base of $184,500 (Publication 15), so the full 15.3% applies. The tax is $6,300.37, and half, $3,150.18, is an above-the-line deduction. Without the write-down the tax would be $6,611.22. See self-employment tax.

The QBI deduction, checked against all three limits (with the write-down).

The taxable-income cap limits her, not 20% of QBI. See the QBI guide.

Income tax. Taxable income after QBI is $25,339.82 minus $5,067.96, or $20,271.86. Under the 2026 single brackets in Rev. Proc. 2025-32, the first $12,400 is taxed at 10% and the rest up to $50,400 at 12%, so the tax is $1,240.00 plus 12% of $7,871.86, or $2,184.62. Her taxable income stays inside the 12% band with or without the write-down, so one rate applies to the whole $2,200 and no bracket boundary is crossed. Her total federal tax is $8,484.99 ($2,184.62 plus $6,300.37), before any state tax.

Without the write-down, net profit of $46,790.00 gives self-employment tax of $6,611.22, a QBI deduction of $5,476.88 (again the taxable-income cap) and income tax of $2,380.90. The total is $8,992.12.

The difference is $8,992.12 minus $8,484.99, or $507.13 less federal tax in 2026: $310.85 of self-employment tax and $196.28 of income tax. That is about 23 cents of tax saved per dollar written down, because the cap on the QBI deduction takes back part of each deducted dollar.

What happens in 2027. Dana's opening inventory for the lot is $900, not $3,100. If it sells for the $1,200 she offered, gross profit on the lot is $300, and the $300 of fees and shipping is a 2027 expense, so the lot is about break-even. Without the write-down she would have recorded a $2,200 loss in 2027 instead ($1,200 of sales against $3,100 of cost, plus the same $300 of fees). The write-down moved $2,200 of deduction from 2027 into 2026. It did not create one.

Common Mistakes to Avoid

1. Deducting unsold stock as an expense. If you keep an inventory, goods on hand at year-end are in Line 41 until valued lower, sold, used or disposed of.
2. Writing down goods that are only slow. The rule covers damage, imperfections, shop wear, changes of style, odd or broken lots and similar causes.
3. Valuing at a hoped-for price. The regulation requires an actual offering by 30 days after the inventory date.
4. Forgetting direct cost of disposition. The value is the bona fide price minus that cost.
5. Switching to cost-or-market just to write down damaged goods. The rule applies under either basis.
6. Valuing the whole inventory against market. Publication 538 says to value each item separately under the lower of cost or market method.
7. Throwing goods away with no record. The regulation expects records of the disposition that let your inventory be verified.
8. Claiming a stolen or destroyed lot twice. Publication 538 says you cannot claim the loss again as a casualty or theft loss.
9. Deducting a donation of inventory you never counted as cost. Publication 526 gives such inventory a basis of zero for the charitable deduction.
10. Treating the write-down as permanent. It reverses into profit or a smaller loss when the goods sell.

How CentSense Helps

CentSense gives you the purchase records that a write-down depends on:

• Scan every inventory purchase, freight and marketplace-fee receipt with AI as you pay it, categorized by Schedule C line, so the cost of each lot is documented before it turns into dead stock
• Log miles by date (Solo plan) for supplier runs and drop-offs. CentSense's mileage export applies a single annual rate and does not apply the July 1, 2026 split (72.5 cents, then 76 cents) to each trip, so value each trip at the rate for its date
• Export a CPA-ready category breakdown as CSV when the return is due

CentSense tracks expenses and mileage. It does not count your inventory, decide which goods qualify for a write-down, value your closing inventory or keep your clearance listings, so keep those records alongside it. For related reading, see Etsy Seller and Online Reseller Tax Deductions, FIFO vs LIFO for Resellers and Schedule C Part IV: Vehicle Information.

Frequently Asked Questions

Can I write off inventory I can't sell on Schedule C?

Sometimes, but not by simply deducting it. If you keep an inventory, unsold goods stay in your closing inventory at cost until you sell them, use them or value them lower. Treasury Regulation 1.471-2(c) requires goods that are unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots or other similar causes to be valued at bona fide selling prices less direct cost of disposition, and Publication 538 says to do this no matter which method you use for the rest of your inventory. The lower value reduces closing inventory on Line 41 and so raises Cost of Goods Sold. The regulation puts the burden of proof on you to show the goods fit those causes, and you must keep records of what happened to them. Merely slow-moving goods priced at normal prices are not on the regulation's list. This applies only if you keep an inventory, and the write-down only moves the deduction into this year from the year the goods sell. Confirm how it applies to your goods with a CPA or EA.

What counts as a bona fide selling price, and what is the 30-day rule?

The regulation says a bona fide selling price means the actual offering of goods during a period ending not later than 30 days after the inventory date. For a December 31, 2026 inventory date, the offering period must end no later than January 30, 2027. In practice that means real listings or clearance tags at the lower price, with dates, not an estimate of what the goods might fetch. You subtract the direct cost of disposition, such as selling fees and shipping you would incur to move them, to get the inventory value. The burden of proof is on you, so keep the listings, price tags or invoices. Whether your listing evidence is enough is a judgment to confirm with a CPA or EA.

Do I have to switch to the lower of cost or market method on Line 33 to write down damaged goods?

No. The regulation says the damaged-and-unsalable valuation applies whether the cost basis or the cost-or-market basis is used, and Publication 538 says to value these goods at their bona fide selling price minus direct cost of disposition no matter which method you use to value the rest of your inventory. So a business that checks the Cost box on Line 33 still applies it to its subnormal goods. Line 34 asks whether there was any change in determining quantities, costs or valuations between opening and closing inventory, and if you answer Yes you attach an explanation. Whether a write-down of subnormal goods calls for a Yes is a question for a CPA or EA. Changing your overall inventory method is a separate step that generally involves Form 3115.

Can I just throw out dead stock and deduct what I paid for it?

If you keep an inventory, goods you have actually disposed of are no longer on hand, so a year-end physical count leaves them out of closing inventory and their cost stays in Cost of Goods Sold. Publication 538 says you must take a physical inventory at reasonable intervals and adjust the book amount for inventory to agree with the actual inventory. You are not deducting the cost twice or on a separate line. The risk is proof: the regulation says you must maintain records of the disposition of the goods that let your inventory be verified, so photograph the goods, write down the date and quantity and keep the cost invoices. This applies only if you keep an inventory. If you instead treat inventory as nonincidental materials and supplies, the cost is deducted in the year the items are first used or consumed, and whether discarding unsold items counts as consumption is something to confirm with a CPA or EA.

What if I donate unsellable inventory to charity?

The treatment depends on when you bought the goods. Publication 526 says that if the cost of donated inventory is not included in your opening inventory, its basis is zero and you cannot claim a charitable contribution deduction, and that you include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. If the goods were in your opening inventory, the deduction is the smaller of fair market value on the day you gave them or their basis, you must remove that amount from your opening inventory, and it is not part of Cost of Goods Sold. Publication 526 also says that, generally, to deduct a charitable contribution you must itemize deductions on Schedule A. The 2026 non-itemizer charitable deduction covers cash gifts only, so it does not help with donated goods. Special rules apply to food inventory. Ask a CPA or EA before you donate a large lot.

What if my inventory is stolen or destroyed in a fire, flood or other disaster?

Publication 538 says you claim a casualty or theft loss of inventory, including items you hold for sale to customers, through the increase in the cost of goods sold by properly reporting your opening and closing inventories, and that you cannot claim the loss again as a casualty or theft loss. Any insurance or other reimbursement you receive is taxable. You can instead choose to claim the loss separately, but then you must adjust opening inventory or purchases to eliminate the loss items so they are not counted twice, and you reduce the loss by the reimbursement you receive or expect to receive. If the loss is from a federally declared disaster, you can choose to deduct it on the prior year's return, and you must then decrease your opening inventory for the year of the loss. Which route is better depends on your facts, so confirm it with a CPA or EA.

Does a write-down permanently lower my taxable income?

No. A write-down moves a deduction into the year you take it from the year the goods would otherwise have sold. The lower closing inventory becomes next year's lower opening inventory, so when you later sell the goods for the clearance price, little or no profit is recorded against the written-down value. In the worked example below, a $2,200 write-down lowers 2026 federal tax by $507.13 for a single filer with no other income, and the same goods sold in 2027 at the offered price produce about break-even results before other costs. A write-down is most valuable when your bracket this year is higher than next year's, or when it is simply true that the goods are worth less. It is not a way to create a permanent loss. This applies only if you keep an inventory, and a CPA or EA can confirm your timing.

Which records should I keep to support an inventory write-down?

Keep what the regulation asks for: proof that the goods fall within the listed causes, and records of the disposition of the goods that allow your inventory to be verified. The regulation puts the burden of proof on you. That means purchase invoices showing cost, dated photos of the damage or flaw, the year-end count by item, the listings or clearance tags that show the lower price offered within 30 days after the inventory date, the fees or shipping you counted as direct cost of disposition, and later sales records or disposal notes. Publication 538 also says to value each item separately when you use the lower of cost or market method, so keep item-level detail. Keep the records for as long as the return can be examined, and ask a CPA or EA how long that is for your situation.

Authoritative References

• IRS: Instructions for Schedule C (Form 1040)
• IRS: Schedule C (Form 1040)
• IRS: Publication 538, Accounting Periods and Methods
• IRS: Publication 334, Tax Guide for Small Business
• IRS: Publication 526, Charitable Contributions
• 26 CFR 1.471-2: Valuation of inventories (Cornell LII)
• 26 CFR 1.471-4: Inventories at cost or market, whichever is lower (Cornell LII)
• IRS: Rev. Proc. 2025-32 (2026 standard deduction, brackets and section 199A threshold)
• IRS: Publication 15 (2026 Social Security wage base)
• 26 U.S.C. 199A: Qualified business income (Cornell LII)

Stop guessing at year-end what your shelf cost you. Start a free CentSense account, scan every inventory and supply receipt with AI as you pay it, log your miles by date, and export a CPA-ready Schedule C breakdown at tax time. The free tier includes 10 AI receipt scans a month, no credit card required, and the Solo plan is $5/month for unlimited scans, mileage tracking and CSV export.

This guide is general education for U.S. sellers who keep an inventory and file a Schedule C in 2026. It is not personalized tax advice. Whether your goods qualify for a write-down, whether your listing evidence is enough, how to answer Line 34, how a donation, theft or disaster loss should be reported, and whether you should keep an inventory at all are judgment areas, and the facts that drive your numbers should be confirmed by a CPA or EA based on your full situation.