Tax and SARS knowledge base
Can a business write down slow-moving, damaged or obsolete stock for tax?
Can a business write down slow-moving, damaged, or obsolete stock for tax?
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Direct answer
Possibly, but not automatically. A business can only claim a tax diminution in closing trading stock where the tax requirements are met and the reduced value is supported by objective evidence. A broad accounting provision for old stock or an expected future markdown is not enough by itself.
SARS Interpretation Note 140 explains the approach to diminution in the value of closing stock. The practical lesson is to identify the affected stock, establish its tax cost, document why its value has fallen and separate the tax claim from any more general financial-reporting impairment.
What this means in practice
Inventory reports often contain a column called “provision” or “write-down”. That is useful for management, but tax needs more. SARS may ask why a particular product was worth less at year end and how the figure was calculated. The best answer is a file that ties each claim to evidence, not a percentage applied to all stock older than a chosen number of days.
Slow-moving stock may still be saleable at cost. A product can have a long sales cycle, be seasonal, be held for a contractual order or be delayed by supply-chain disruption. Damage or obsolescence is more persuasive where evidence shows that the product cannot be sold normally, must be discounted, is superseded, has expired or will be scrapped. The company should also consider events after year end, such as actual sales or destruction, where those events shed light on year-end value.
The accounting team and tax adviser should work from the same inventory schedule but prepare distinct conclusions. That avoids two common mistakes: assuming the accounting impairment must be deductible, or ignoring an available tax diminution because no one saved evidence while the loss was being managed operationally.
Step-by-step
- Build an ageing and condition report.
Start with stock code, description, quantity, location, cost, last sale date, expected selling route and relevant condition. Include stock held by branches, warehouses and third parties. Mark whether the issue is slow movement, physical damage, expiry, obsolescence or another event.
- Gather evidence while it exists.
Take dated photographs of damaged goods. Retain supplier discontinuation notices, engineering reports, quality-control records, expiry data, customer cancellations, markdown authorisations and warehouse reports. If stock was destroyed, retain approvals and destruction certificates.
- Use post-year-end information carefully.
Sales after year end, realised discounts, return records and scrap proceeds can provide evidence about condition at year end. Keep the transaction-level support. Do not use a later management decision to create a retrospective tax result without considering what was known at year end.
- Calculate the proposed reduction by item or defensible class.
Show tax cost, expected recovery, proposed value and rationale. A claim should be traceable, reviewable and consistent with the stock-count records. Explain grouping if individual-item analysis is impractical.
- Test against the tax rules.
Use the current legislation and SARS note rather than relying only on accounting standards. Ask a tax professional to review material values, complicated products or unusual valuation methodologies.
- Reconcile and retain.
Reconcile the claim to the inventory ledger, general ledger, tax computation and ITR14 supporting file. Keep the evidence for the applicable record-retention period.
Documents and records to keep
Keep stocktake sheets, inventory ledgers, ageing reports, supplier invoices and costing schedules. For the diminution, retain photo evidence, damage reports, quality reports, expiry records, discount approvals, sale invoices after year end, scrap records and the calculation. Include management review and tax-adviser correspondence where relevant.
Important limits and exceptions
This article does not provide a general deduction for every anticipated inventory loss. It also does not cover insurance settlements, VAT adjustments, capital assets or the accounting treatment of impairment. A business should not write down stock merely because it wants to improve a tax result or because a budgeting team has selected a standard reserve percentage.
The right outcome depends on facts, stock type and the relevant income-tax period. Imported inventory, regulated products, pharmaceutical or food expiry, contract stock and high-value specialist components often need deeper analysis.
When to get tailored advice
Get advice before claiming a material diminution, especially if the business has not previously claimed one, relies on a model or percentage, or faces a SARS verification. Advice is also appropriate for stock damaged in a disaster, obsolete technology, inventory held abroad or stock subject to a financing arrangement.
TaxProof can help structure the inventory evidence file and reconcile it to the tax workpapers. We cannot certify a valuation or guarantee that SARS will accept a claim.