Closing a Business: What to Do With Inventory?

Shutting down a business comes with many logistical challenges, and dealing with leftover inventory is one of the most important. Whether it’s unsold products, raw materials, or excess supplies, deciding what to do with these assets affects your financial situation and tax obligations.

There are several ways to handle remaining stock, from selling through different channels to donating for tax benefits. Understanding your options helps minimize losses and wrap up operations efficiently.

Evaluating Leftover Stock

Before deciding how to handle inventory, assess its value and condition. Categorize items based on marketability—some products may still be in demand, while others could be outdated or damaged. Conducting a physical count ensures records align with actual stock levels, preventing discrepancies. Cross-referencing inventory tracking software with on-hand quantities can highlight shrinkage or mismanagement issues.

Determining fair market value for each item informs decision-making. For goods with an established resale market, recent sales data or competitor pricing serve as benchmarks. For specialized or custom products, valuation may require cost-based methods, factoring in production expenses and depreciation. If inventory has lost value, applying lower-of-cost-or-market (LCM) accounting under Generally Accepted Accounting Principles (GAAP) ensures accurate financial reporting. The IRS allows inventory write-downs under Section 471 if there is clear evidence of reduced worth.

Obsolescence is another key factor. Perishable goods, seasonal items, or technology-dependent products may lose value quickly. If stock is nearing expiration or has been discontinued, adjusting book values prevents overstating assets. Businesses using first-in, first-out (FIFO) or last-in, first-out (LIFO) accounting should consider how liquidation strategies impact taxable income, as selling older stock first affects cost basis calculations.

Potential Sales Channels

Selling leftover inventory can help recover costs. Clearance sales through retail or e-commerce platforms attract budget-conscious customers. Marking down prices or bundling slow-moving items with popular products can encourage larger purchases. If direct sales prove difficult, third-party liquidation companies buy bulk inventory at discounted rates and resell through discount retailers, online marketplaces, and international buyers.

For businesses with wholesale relationships, reaching out to distributors or industry contacts may offer an opportunity to offload stock. Some wholesalers accept returns or buy back surplus goods at a reduced price. If existing partners are uninterested, business-to-business (B2B) marketplaces like Liquidation.com or B-Stock Solutions connect sellers with bulk buyers through auctions or fixed-price sales.

Online resale channels can also be effective. Marketplaces like eBay, Amazon, and Facebook Marketplace provide access to individual buyers, while niche platforms cater to specific industries. Poshmark specializes in apparel, while Reverb focuses on musical instruments. Businesses should factor in platform fees, shipping costs, and competition when setting prices. Transparency about product condition helps build trust and prevent disputes.

Donation and Write-Off Options

Donating unsold inventory can support charitable organizations while reducing tax liability. Donations to qualified 501(c)(3) nonprofits may be eligible for a deduction under Section 170 of the Internal Revenue Code. C corporations can deduct the lesser of either the property’s cost basis plus half the difference between fair market value and cost or twice the cost basis. For sole proprietorships, partnerships, and S corporations, the deduction is generally limited to the item’s adjusted basis.

To ensure compliance, donations must go to IRS-recognized tax-exempt organizations, not individuals. Proper documentation is required, including a written acknowledgment from the recipient detailing the donation date, description, and confirmation of no goods or services received in return. If the total value exceeds $500, Form 8283 must be filed with the business’s tax return. For donations exceeding $5,000, an independent appraisal is often necessary.

Certain industries may benefit from specialized donation programs. Retailers and manufacturers in the food sector can take advantage of the enhanced deduction for qualified contributions under Section 170(e)(3), provided donations meet safety and distribution requirements. Technology firms can donate computers to educational institutions under programs that offer additional tax incentives. Strategic donations can also improve public relations and foster goodwill within the community.

Accounting for Liquidation

Properly accounting for liquidated assets ensures accurate financial reporting and tax compliance. If inventory is sold below cost, the resulting loss must be recognized as an expense, reducing taxable income. If assets are sold at a gain, the difference between book value and sale price is considered taxable income, subject to ordinary tax rates or capital gains treatment, depending on asset type and holding period.

For businesses using the accrual method, revenue from liquidation sales must be recorded when earned, not when cash is received. If extended payment terms are offered, accounts receivable should reflect outstanding balances, and uncollectible amounts may require a bad debt write-off under Section 166 of the Internal Revenue Code. Any prepaid expenses, such as supplier deposits or insurance premiums, should also be adjusted to reflect recoverable amounts.

Recordkeeping for Final Inventory

Maintaining organized records ensures that all sales, donations, and disposals are accurately reflected in financial statements and tax filings. The IRS requires businesses to retain inventory records for at least three years, though longer retention may be advisable for audit or legal purposes.

For inventory sold, detailed invoices should document buyer information, transaction amounts, and payment terms. If discounts or bulk pricing were applied, these should be clearly noted to justify any discrepancies between book value and sale proceeds. Donation records must include acknowledgments from recipient organizations, while inventory write-offs should be supported by internal memos detailing obsolescence or spoilage. Businesses using perpetual inventory systems should reconcile final stock levels with recorded transactions to ensure no discrepancies remain before closing financial books.