FORTUNE Small Business:

How to write off defective imports

FSB's Anne Fisher helps small-business owners get answers to their questions.

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(FORTUNE Small Business) -- Dear FSB: My scientific-supply firm imports many of its products from China. Upon checking my last shipment, I saw that about half of the goods had defects. I'm trying to make the vendor replace them or refund my money, but in the meantime, how do I document the goods' disposal to satisfy the IRS?

-Christopher Cameron, President
Sci-Supply
Cincinnati

Dear Christopher: To deduct the loss from your taxes, take the same steps you would if the goods came from, say, Akron - except that, in that case, you'd have no import duties to write off.

"Documentation is key," says Cym Lowell, a partner with Gardere, a Dallas law firm that handles international tax issues. "Photograph the merchandise to clearly show its defects. Keep copies of all letters you write to the vendor, indicating your efforts to get a refund or replacement."

Also, maintain records of what you paid for the merchandise and all receipts for its storage and disposal.

"As long as your files document each transaction detail, you're covered if you're audited," Lowell says. Should the vendor later make good, you'll have to declare the payment as income.

"In the future, request inspection certificates," says Laurel Delaney, CEO of GlobeTrade, a Chicago firm that advises entrepreneurs on overseas expansion. Having the merchandise inspected by a third party before it leaves China "offers proof that the shipment is correct, and in good condition," Delaney says. "It's worth the fee you'll pay to the inspector."

Ask your shipper to suggest a reliable inspection firm, or check with the U.S. Commercial Service in China. To top of page

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