Inventory Tax Credit

Inventory taxes have long been a source of friction between states and local jurisdictions. They are largely unpopular with businesses and often seen as detrimental to a state’s business climate. But local governments also heavily rely on them to provide much-needed revenue. As a result, many states and localities have taken steps to lighten the load on businesses through credits like Inventory Tax Credit and special exemptions. For example, Kentucky, which imposes inventory taxes at the state level, offers a credit that can be claimed on individual and corporate income tax returns and limited liability entity tax returns. In addition, Louisiana imposes inventory taxes at the local level and provides businesses with a credit on their parish inventory tax bills that can be applied against their state income tax bills.

The inventory tax credit is a rebate on property taxes paid on the raw materials, work-in-process, and finished goods that manufacturers keep for sale. It is typically levied at the parish level, with businesses paying the parish taxes then claiming a portion of that amount back on their state tax return. The credit is important because it helps offset inventory costs, such as storage, insurance, and financing. A business that maintains a large inventory is more productive than a smaller one because it can quickly satisfy customer orders and handle supply disruptions more readily. However, he points out that there are also significant costs associated with inventory, such as investment, carrying, and financing costs.

Who is Eligible for Inventory Tax Credit?

In order to qualify for the inventory tax credit, a business must identify and value its inventory in one of several ways: cost, market, or LIFO (last in, first out). In addition, businesses must keep track of all inventory transactions at the local level and file a report with each locality. This can be time-consuming and resource intensive, especially for small businesses that operate in multiple localities.

In addition, several other taxes and fees can affect a business’s bottom line. For this reason, businesses need to consult with professionals for assistance in preparing their inventory tax returns. Working with a logistics partner that understands the complexities of inventory taxes can help a business maximize its tax credits and deductions. Additionally, an expert can help a company navigate any potential regulatory issues or changes to the tax code.

How to Calculate Inventory Tax?

Inventory taxes are complex, and the rules surrounding them change frequently. Whether your eCommerce business sells through brick-and-mortar stores or online, you need to be careful about tracking inventory and valuing it correctly. The right inventory management, warehousing, and distribution strategies can help you avoid unexpected tax surprises.

An inventory tax calculator helps you keep track of your company’s tax-deductible expenses. It can also be used to calculate the cost of goods sold (COGS) and inventory turnover rates, which help you determine how efficiently you turn your inventory into revenue.

For example, the Kentucky Department of Revenue has developed an online inventory tax credit calculator. It will calculate the inventory tax credit for one or more locations and generate a completed Schedule INV that should be attached to the taxpayer’s income tax return on Lines 31-36.