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February, Week 4 Down

In the final week of February, independent grocers reported that their sales were down 5.8 percent compared to the same period in 2015. The strong opening to the month seems like a distant memory, with three straight weeks of negative sales figures. February overall was down 2.16 percent compared to February 2015. Customer counts, however, were up 1.15 percent.

The Bureau of Labor Statistics released its February unemployment report, and the results were largely strong. The economy netted 242,000 jobs in the month and the unemployment rate held at 4.9 percent. Revisions for the previous two months showed 30,000 more jobs than previously reported. The size of the labor force grew by 555,000 workers and the participation rate ticked upwards by 0.2 percent. The one piece of discouraging news was the decrease in hourly earnings by three cents. Overall, however, this was a very good report after the very mediocre January report.

Same Store Sales
% Change from last year

Same Store Sales – Previous Months

BGBC Partners Tax Update: Inventory Theft Losses

As a grocery store owner, you are well aware of the unfortunate and significant costs associated with inventory theft losses. You may also be familiar with the concept of shrinkage. Theft losses are one component of shrinkage with the other component falling under the broad category of “operational errors” which generally includes shrinkage due to a breakdown in or absence of “Operational” best practices.

In this segment we are going to discuss the tax treatment of theft loss since it represents such a significant part of overall shrinkage costs.
Theft losses relate to specific instances where somebody steals your inventory. Although insurance may compensate for some of these costs, what about the balance, are you supposed to just absorb that as another expense of doing business? Fortunately, the tax law provides for additional relief, as long as certain requirements are met. In this segment, we are going to summarize the major requirements for obtaining a tax deduction for inventory theft losses.

Let’s assume you perform an inventory of goods on hand and find that a sizable amount can only be attributable to theft. You file an insurance claim and there is only a partial reimbursement. How can you obtain some more relief through the tax code? The calculation steps are as follows:

1) Determine the adjusted basis in the inventory before the theft.
2) Determine the decrease in fair market value of the inventory
3) From the smaller of the amounts you determined in (1) and (2) subtract any insurance or other reimbursement you received or expect to receive.

Now much of the above will be done through your inventory system and records.

There are two ways you can deduct theft loss of inventory.

One way is to deduct the loss through the increase in cost of goods sold by properly reporting your opening and closing inventories. Don’t claim this loss again as a theft loss. If you take a loss through the increase in cost of goods sold, include any insurance or other reimbursement you receive in gross income.

The other way is to deduct the loss separately. If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. Reduce the loss by the insurance reimbursement you receive and don’t include the reimbursement in gross income.

If you don’t receive an insurance reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery.

In general, the tax laws require that you should be able to show all of the following:

1) When you discovered that your property was missing.
2) That your property was stolen.
3) That you were the owner of the property.
4) Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.

If you receive insurance or reimbursement that is more than what you paid for the inventory, a gain must be reported in the year in which the theft occurred.

The best thing a grocery store owner can do in the case of theft is to document everything. It cannot hurt to have as much documentation and evidence of the theft as possible. When inventory theft occurs, you would not want to miss out on a chance to deduct those losses on the tax return. Hopefully this kind of incident will never happen in your grocery store or business, but if it does, contact a CPA to help you through these rules.

For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).

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