Obsolete inventory is stock that can no longer be sold at or above its carrying cost in the ordinary course of business. A write-down reduces the recorded value of that stock to what it is actually worth. A write-off removes it from the books entirely, usually because it has been disposed of or has no recoverable value at all.
The two words get used interchangeably in conversation and mean different things on a balance sheet. Getting the distinction right matters, because one of them your accountant can support and the other one attracts questions.
Net realizable value. Under ASC 330, the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. For a marketplace seller, disposal costs include referral fees, fulfillment fees, and outbound shipping, which is why NRV is usually lower than sellers expect.
Lower of cost and net realizable value. The measurement rule. FASB ASC 330-10-35-1B requires inventory measured using a method other than LIFO or the retail inventory method, which covers FIFO and average cost, to be carried at the lower of cost and NRV. This replaced the older lower of cost or market test through Accounting Standards Update 2015-11, issued in July 2015.
Write-down. A reduction of carrying value to NRV while the goods remain on hand and on the books at the reduced amount. Reversal is not permitted under U.S. GAAP once taken, so the new value becomes the cost basis.
Write-off. Removal of the asset entirely. Appropriate when goods are scrapped, donated, destroyed, or have no realizable value.
Obsolescence reserve. A contra-asset account holding an estimate of future write-downs, so the expense is recognized as the exposure develops rather than in one lump when the disposal happens.
Slow-moving. Not a synonym for obsolete. Slow-moving stock still sells above cost, just gradually. Obsolete stock does not.
Shrinkage. Units missing. A quantity problem, not a value problem, and accounted for separately from obsolescence.
Aged inventory. Stock past a defined age threshold. A leading indicator of obsolescence, covered in more detail in the inventory aging report.
This is the part that catches sellers, and it has a well-known origin.
In Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979), the Supreme Court considered a manufacturer that had written down inventory it judged to be excess while continuing to offer the same goods for sale at their original prices. The Court upheld the Commissioner's disallowance of the write-down, holding that conformity with generally accepted accounting principles does not by itself establish that a method clearly reflects income for tax purposes.
The practical consequence has shaped inventory tax treatment ever since. A write-down that is appropriate for financial reporting does not automatically produce a deductible loss. Generally, a tax deduction requires that the goods actually be disposed of, or offered for sale at the reduced price, rather than simply revalued on paper.
That is a general description of how the rules work and not advice about your situation. The specific treatment depends on your facts, your method, and your elections. Take it to your CPA, or find one who already works with inventory businesses through the ecommerce accountant directory.
A seller has 3,100 units of a discontinued SKU. Landed cost is $12.40 per unit, so carrying value is $38,440.
The product was replaced by a newer model. Trailing 90-day sales are 38 units. At that rate the stock represents roughly 20 years of supply.
Establishing net realizable value. Realistic clearance price on a marketplace channel is $14.99. Against that:
Net realizable value per unit: $7.17.
The write-down. Carrying value $12.40 versus NRV $7.17 means a reduction of $5.23 per unit. Across 3,100 units, that is $16,213.
The entry reduces inventory by $16,213 and records the loss in the period. The remaining carrying value is $22,227. Under U.S. GAAP that new value is now the cost basis and cannot be written back up if the market improves.
What happens next matters. If the seller then actually lists and sells the units at $14.99, the tax position is straightforward, because the goods were offered at the reduced price. If the units sit in the warehouse at their original list price while carrying $22,227 on the books, the write-down is a book entry with a weaker tax position behind it, which is the exact fact pattern in Thor Power Tool.
The disposal alternative. Scrapping the units entirely, with documentation, produces a write-off of the full $38,440 rather than a $16,213 write-down. That is a larger deduction and a total loss of the $22,227 of recoverable value. Selling at clearance is almost always better economically even though the tax entry is smaller.
Three tests, applied together rather than individually.
Coverage. Months of supply at trailing 90-day velocity. Anything above 18 months is a candidate. Anything above 36 months is not a candidate, it is obsolete stock that has not been labeled yet.
Price trajectory. Has the price you can actually achieve fallen below cost plus fees. If yes, the write-down is already required, not optional.
Replaceability. Has a newer version, a different pack size, or a competitor product taken the demand. Products replaced by their own successors rarely recover.
Recognizing a large write-down in one period distorts that period and hides the trend. A reserve smooths it and, more usefully, forces a quarterly conversation.
A workable method for a seller: apply a reserve percentage by age band. Zero percent on stock under 180 days, 10 percent on 181 to 365, 35 percent on 366 to 540, 75 percent above 540. Recalculate quarterly from the aging report.
Applied to a $846,200 inventory with $77,760 in the 181 to 365 band and $35,708 above 365, that produces a reserve in the range of $20,000 to $28,000 depending on how the older stock splits. The number is an estimate, it is defensible, and it stops the annual surprise.
Document the methodology once. A reserve percentage that changes to hit a margin target is not a reserve, and an auditor or a buyer will find that.
Receipt dates preserved on cost layers so age is real rather than estimated. Landed cost in the unit so the write-down is calculated against the right basis. Stock tracked by location including marketplace fulfillment centers, since aged units are often stranded there. And inventory reports by warehouse, by value, and by aging, which is what ConnectBooks provides alongside FIFO valuation and landed cost allocation.
The velocity half comes from profit and sales reporting at SKU level, and both rest on receipts and settlements posted at transaction level.
Write-downs are not a failure of forecasting to be hidden. They are the accounting consequence of a purchasing decision that has already happened, and delaying recognition makes the eventual number larger, not smaller.
Review the aging report quarterly, apply a documented reserve, and when a SKU is genuinely done, price it to move rather than carrying it at cost and hoping. The cash and the shelf space are both worth more than the balance sheet line.
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