Inventory Write-Offs – Can You Claim?

Introduction

Inventory plays a vital role in determining the profitability and financial position of a business. But what happens when stock becomes damaged, obsolete, or unsellable? Businesses may need to write off inventory, and the good news is that under UAE Corporate Tax Law, such write-offs can be claimed as deductible expenses—provided certain conditions are met.

Sheikh Anwar Accounting and Auditing LLC explains how inventory write-offs are treated under UAE Corporate Tax Law, when such losses are deductible, and what documentation is required to stay compliant.

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📜 Legal Framework

Inventory write-offs are covered under:

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses

• General tax principles on allowable deductions

• Ministerial Decision No. 114 of 2023 – Conditions for deducting losses and write-offs

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✅ What is an Inventory Write-Off?

An inventory write-off occurs when a portion of a company’s stock is identified as:

• Damaged or spoiled

• Obsolete or expired

• Lost or stolen

• Unsellable due to legal or market conditions

In accounting, the value of such inventory is removed from the books and recorded as an expense in the income statement.

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🧾 Tax Deductibility of Inventory Write-Offs

Under the UAE Corporate Tax regime, inventory write-offs are tax deductible if the following conditions are satisfied:

1. The write-off is incurred wholly and exclusively for the purposes of the taxable business.

2. The write-off reflects a genuine loss of value or physical stock.

3. The value was previously accounted for as part of inventory or cost of goods sold.

4. The write-off is properly recorded and documented.

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📌 Common Scenarios That Justify Inventory Write-Offs

Scenario Tax Deductible? Conditions

Goods expired (e.g., perishable items) ✅ Yes Expiry date records, disposal logs

Items damaged in storage or transit ✅ Yes Insurance report, warehouse notes

Obsolete technology stock ✅ Yes Market valuation, sales reports

Theft or pilferage ✅ Yes Police report or internal investigation

Inventory mismanagement or fraud ✅ Yes (case-by-case) Internal controls, disciplinary reports

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📂 Documentation Required

To support the deductibility of inventory write-offs, you must retain:

• Stock movement and adjustment reports

• Inventory count sheets and reconciliation records

• Damage reports, expiry logs, or spoilage records

• Disposal records (e.g., waste management confirmations)

• Board resolution (for large-scale write-offs)

• Accounting journal entries

Sheikh Anwar Accounting and Auditing LLC ensures your inventory adjustments are properly justified and documented for FTA audit readiness.

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🔍 Important Considerations

1. Partial vs. Full Write-Offs

If part of an inventory item is damaged or unsellable, only the proportionate value may be deducted.

2. Impact on Cost of Goods Sold (COGS)

Inventory write-offs must be segregated from COGS and shown separately as “Inventory Loss” or “Write-Off Expense.”

3. Related Party Transactions

Inventory transferred or sold to related parties below market price should follow transfer pricing rules. Improper valuation may result in denial of deductions.

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🚫 When Inventory Write-Offs May Be Disallowed

• Inventory not previously accounted for in taxable income

• Write-offs not supported by documentation

• Losses due to personal use or non-business reasons

• Stock write-downs recorded as provisions (not actual losses)

• Inflated or manipulated inventory losses to evade tax

FTA reserves the right to disallow deductions if it deems the transaction artificial or lacking substance.

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🧠 Example – Real-Life Application

XYZ Pharmaceuticals LLC had AED 100,000 worth of medicines expire in June 2024.

Step Action

Inventory recorded in books? ✅ Yes – included in cost of goods

Expiry proof available? ✅ Yes – Batch records and expiry logs

Disposal documented? ✅ Yes – Waste management company report

Written off in accounts with resolution? ✅ Yes – Board resolution + entry booked

✅ Result: AED 100,000 inventory write-off is allowable as a deduction for FY 2024.

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🧾 Accounting and Tax Treatment

Accounting Corporate Tax

Debit: Inventory Write-Off Deductible expense if conditions are satisfied

Credit: Inventory Account Reduces assets on the balance sheet

Ensure alignment between accounting treatment and tax computation to avoid reconciliation issues during tax filing.

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📣 Final Thoughts

Inventory write-offs are a practical necessity in business operations, especially in sectors like retail, food, electronics, pharmaceuticals, and logistics. However, not all inventory losses automatically qualify for tax deduction.

To claim these expenses under UAE Corporate Tax, businesses must:

• Prove that the loss was genuine and unavoidable

• Maintain sufficient documentation

• Comply with FTA’s conditions on deductibility

At Sheikh Anwar Accounting and Auditing LLC, we help businesses correctly evaluate, record, and report inventory write-offs for both accounting and tax purposes—ensuring full compliance and minimizing audit risks.

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📩 For professional assistance with inventory adjustments and corporate tax filing:

🌐 Visit: www.sa-auditors.com

📧 Email: info@sa-auditors.com