If you’re sitting on obsolete inventory, you have five realistic options: discount and sell it through your own channels, offload it to a liquidator, return it to the supplier under your contract, donate it to a qualified charity for a tax deduction, or write it down and scrap it. Deciding what to do with obsolete inventory comes down to how much value the goods still hold, what your supply agreements allow, and your business structure. The stakes aren’t small. Carrying costs for warehoused products typically run 20% to 30% of total inventory value per year, so a shelf of dead stock quietly drains roughly a quarter of its own worth every year it sits.
Sell It First, While It Still Has Value
The fastest recovery comes from moving product through channels you already control. Clearance events, flash sales, and end-of-season promotions at 50% off or deeper create urgency and free up shelf space. Bundling a slow mover with a popular item in a buy-one-get-one deal keeps your average transaction value up while pushing dead stock out quietly. Selling to your own customers protects margins better than handing goods to a third party.
When volume outruns what your channels can absorb, liquidators and surplus buyers purchase distressed inventory in bulk. Recovery is thin. Depending on the category, these buyers often pay between five and fifteen cents on the dollar. What you get for that discount is speed: the liquidator takes title and physical possession in a single transaction, and the goods are off your books. Before signing, verify the buyer’s logistics capacity and restrict in the contract how and where they can resell. Branded products showing up on discount sites can damage your primary channels more than the recovery is worth.
Check Your Supply Agreements Before Anything Else
Many supply contracts shift some obsolescence risk back to the manufacturer, and skipping this step means leaving money on the table. Look at two provisions in particular.
Stock Balancing Clauses
Stock balancing lets you swap slow-moving items for faster-selling products of equivalent value from the same supplier. Manufacturers often accommodate this because they have distribution channels you don’t. These clauses come with deadlines and quantity caps. Missing a contractual return window by even a week typically forfeits the right entirely, so pull the contract before the window closes, not after.
Buy-Back and Return-to-Vendor Arrangements
Some suppliers offer formal buy-back or return arrangements. The process starts with a Return Merchandise Authorization, which is the supplier’s permission to ship goods back. You’ll need your original purchase orders and packing lists to verify prices. Expect restocking fees, commonly between 10% and 25% of the original purchase price. Even net of fees, a partial refund beats writing the inventory to zero, especially on higher-cost goods. If you’re negotiating a new supplier relationship, push for return provisions while you still have leverage.
Donate It for a Tax Deduction
Donating dead stock to a qualified 501(c)(3) nonprofit can generate a deduction while supporting a cause. How much you can deduct depends on your business structure and what you’re giving.
The General Rule
For most businesses, the deduction equals the lesser of the item’s fair market value on the contribution date or its cost basis. If the donated inventory was in your opening stock for the year, the basis is whatever cost you would have included in opening inventory. If it wasn’t in opening inventory, the IRS treats the basis as zero, meaning no deduction at all.1Internal Revenue Service. Publication 526 (2025), Charitable Contributions Sole proprietors, partnerships, and S-corporation shareholders take the deduction at the individual level, limited to basis.
The Enhanced C-Corporation Deduction
C-corporations get a better deal when donating inventory for the care of the ill, the needy, or infants. Under Section 170(e)(3), a qualifying C-corporation can deduct its cost basis plus half the expected profit margin on the donated goods, capped at twice the cost basis.2Office of the Law Revision Counsel. 26 USC 170 Charitable, Etc., Contributions and Gifts The charity must provide a written statement confirming it will use the property solely for those groups and won’t resell it. If the inventory is FDA-regulated, it must have been in full compliance for at least 180 days before the donation.
One change to plan around: for 2026, the One Big Beautiful Bill Act introduced a 1% floor on corporate charitable deductions. C-corporations can no longer deduct contributions that fall within the first 1% of taxable income, though the existing 10% ceiling still applies. For companies donating relatively small amounts against their income, the floor can reduce or eliminate the benefit.
What You Need to Document
The IRS requires a contemporaneous written acknowledgment from the charity for any noncash donation of $250 or more. If the total claimed deduction exceeds $500, complete Section A of Form 8283. Above $5,000, you need a qualified appraisal from an independent appraiser meeting IRS standards, plus Section B of Form 8283.1Internal Revenue Service. Publication 526 (2025), Charitable Contributions The appraisal must be signed and dated no earlier than 60 days before the contribution and no later than the return’s due date.3Internal Revenue Service. Publication 561 (12/2025), Determining the Value of Donated Property Keep your inventory aging reports and cost records organized. If the IRS questions the deduction, the burden of proving fair market value and basis is on you.
Write It Down on the Books
When obsolete inventory can’t be sold at its original price, your financial statements have to reflect that. GAAP and the IRS handle this on parallel tracks.
The GAAP Trigger
Under current standards, inventory measured using FIFO or average cost must be carried at the lower of cost and net realizable value. Net realizable value is your estimated selling price minus reasonable costs to complete and sell the goods. When that number drops below what you paid, you recognize the difference as a loss in the current period.4Financial Accounting Standards Board (FASB). Accounting Standards Update 2015-11 Simplifying the Measurement of Inventory Physical deterioration, obsolescence, and price changes all trigger write-downs. Once written down under GAAP, the reduced value becomes the new cost basis, and you can’t reverse it if the market recovers.
The Reserve Entry
The standard treatment is a two-step approach. First, debit an obsolescence expense account and credit an inventory reserve (an allowance for obsolete inventory). That’s a contra-asset that reduces the inventory’s carrying value on the balance sheet without touching the inventory account. When you eventually dispose of the goods, debit the reserve and credit inventory to remove the items. Building reserves gradually as products age is cleaner than taking a single large hit at disposal.
Reporting on Form 1125-A
For tax purposes, write-downs flow through Form 1125-A (Cost of Goods Sold). Line 9a asks which valuation method you use, including “lower of cost or market.” Line 9b requires you to check a box if you wrote down subnormal goods during the year.5Internal Revenue Service. Form 1125-A Cost of Goods Sold IRS regulations define subnormal goods as inventory unsalable at normal prices due to damage, imperfections, style changes, odd lots, or similar causes. Those goods should be valued at their bona fide selling price minus direct disposal costs, but never below scrap value.6eCFR. 26 CFR 1.471-2 Valuation of Inventories The bona fide selling price must reflect what you actually offered the goods for within 30 days of your inventory date. The reduced value goes on Line 7 (ending inventory), which increases your cost of goods sold deduction on Line 8.
Scrap It, and Document Everything
When inventory has no remaining sale, donation, or return value, physical destruction is the last step. Scrapping is not the same as a write-down. A write-down changes the number on the books; scrapping removes the goods from your facility permanently.
Photograph the inventory before and during destruction. Keep records of what was scrapped, the quantities, the original cost, and the date. If you use a third-party disposal company, get a certificate of destruction or equivalent written confirmation. The IRS doesn’t prescribe a single form for this, but the burden is on you to prove the goods were actually removed from the market rather than diverted. Weak documentation is where inventory deductions fall apart on audit. Photos, a signed destruction certificate, and matching records in your accounting system create a paper trail that’s hard to challenge.
Hazardous or Electronic Goods Have Their Own Rules
Not everything can go in a dumpster. If your obsolete stock includes chemicals, batteries, electronics, solvents, or anything that could be classified as hazardous waste, federal law governs how you get rid of it.
Hazardous Waste Under RCRA
The Resource Conservation and Recovery Act gives the EPA authority over hazardous waste from creation through final disposal. Waste qualifies as hazardous if it shows ignitability, corrosivity, reactivity, or toxicity, or if the EPA has specifically listed it in 40 CFR Part 261.7eCFR. 40 CFR Part 261 Identification and Listing of Hazardous Waste Cleaning products, certain paints, and batteries are frequent triggers.
If your inventory qualifies, you’re a “generator” under RCRA and must follow 40 CFR Part 262. That means preparing a hazardous waste manifest on EPA Form 8700-22, designating a permitted treatment, storage, or disposal facility, and keeping records that let regulators trace the waste from your facility to its final destination.8eCFR. 40 CFR Part 262 Subpart B Manifest Requirements Applicable to Generators Generators must also register with the EPA’s e-Manifest system. Dumping hazardous inventory without following these procedures exposes your business to significant civil and criminal penalties under RCRA.9U.S. EPA. Resource Conservation and Recovery Act (RCRA) and Federal Facilities
Electronics Add a Data-Security Layer
Obsolete electronics carry a second compliance obligation. Devices with internal storage, whether computers, phones, point-of-sale systems, or networking gear, may hold customer data, employee records, or proprietary information. Federal guidelines call for media sanitization consistent with NIST Special Publication 800-88, which covers clearing, purging, and destroying storage media. For hard drives, that means either a triple-pass overwrite following Department of Defense standards or physical destruction of the drive.10Federal Electronics Reuse and Recycling – EPA. Federal Electronics Reuse and Recycling Certified recyclers can typically handle both the environmental and data-destruction obligations in a single transaction and give you documentation for each.