Q: We have a significant quantity of clothing left in our warehouse. In prior years we have scrambled to "get rid of it" at closeout prices because our CPA says this has a tax advantage. HOWEVER at what point can we determine we are actually LOSING money by doing this? If we hold on to inventory and sell it at full price next year, perhaps that's a greater advantage? Is there a formula to help us ascertain what to do?
A: I hate to take exception with your accountant, but selling inventory at less than you otherwise could, simply for "tax reasons", could never really make much sense. If you sell inventory for even $1 less than you could have sold it later, you will always be worse off, unless the carrying cost of that inventory is greater than $1. That would mean you have debt against the inventory and selling it for $1 less now, saves more than $1 in interest costs that would be incurred before you could sell it at its regular price. But none of this has anything to do with "tax reasons". The key point is that giving up $1 in revenue does save money on taxes, since, obviously you have less in income. But giving up the $1 will save you about 30 cents or so in taxes. You save 30 cents but lost $1, so you are not better off. So, if you can sell the inventory at its regular price shortly after the first of the year, I can't think of a good reason for selling it at less than that just because it is the end of the year.
For more details, contact NASE Tax Talk.