Sometimes, you might need to leave your business assets behind because they’re no longer productive, you can’t sell them, or you can’t keep up with loan payments used to buy them. What does this mean for your taxes? It depends on the type of property and what actions you take.
**Obsolete Inventory**
If you have items that have been sitting unsold despite heavy discounts, maybe it’s time to dispose of them. Here are three key points to consider:
– **Handling the items physically**: Depending on the items, you might be able to sell them in bulk to a remainder company or donate them to charity. Otherwise, you might have to throw them out.
– **Updating your financial statements**: You must remove these items from your balance sheet and make adjustments to your income statement.
– **Tax considerations**: You can take an immediate tax deduction for inventory you write down as obsolete. You don’t need to scrap the item but must offer it for sale at the new reduced price for at least 30 days after the inventory date. This write-down option doesn’t apply if you use the LIFO method to value your inventory. If you donate food inventory that’s still wholesome to a qualified tax-exempt organization, you may qualify for a special deduction. C corporations can also get a special write-off for donating inventory to care for the ill, the needy, or infants. Check IRS Publication 526 for more details.
**Obsolete Equipment**
Old computers and other machinery can become outdated. Even if they still work, replacing them might improve performance and reduce utility costs. You can try to sell, give away, or junk obsolete equipment (make sure to dispose of devices like computers and smartphones properly to comply with environmental rules and wipe any personal information).
From a tax perspective, here’s what to consider:
– **Selling the item**: You might have a gain even if you sell it for very little because you probably wrote off the cost through the Section 179 deduction, bonus depreciation, or regular depreciation.
– **Donating the item**: You might not get a charitable contribution deduction, so check the IRS publication mentioned earlier.
– **Throwing away the item**: You might need to “recapture” (report some income) from the Section 179 deduction you claimed when you bought it (see IRS Publication 946).
**Abandoned Real Property**
If you decide to walk away from real estate, you need to understand the tax implications. Abandonment means voluntarily and permanently giving up the property. You must show intent to abandon the property and take action to do so. If there’s a mortgage, things are more complex. Here are some simplified rules:
– If you voluntarily convey the property instead of facing foreclosure, it’s treated as an exchange to satisfy the debt, resulting in a gain or loss.
– If you abandon property secured by debt you’re personally liable for, no gain or loss happens until foreclosure is complete, but you will have cancellation of debt income equal to the canceled debt.
– If you abandon property with non-recourse debt (you’re not personally liable), it is treated as a sale or exchange.
For more details, see IRS Publication 544.
**Conclusion**
The tax rules for handling obsolete inventory and equipment, as well as abandoned property, are quite complicated. Make sure to consult with your CPA or another tax advisor to determine the best strategy for your tax situation.
