How to categorize inventory that can never be sold

Thank you! That's a perfect solution!!

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Let's examine this a bit more: "Personal Property Tax does not apply to business inventories."

Yes, they might be under a taxing authority for this. Example: my County will come in and value everything they see. This person has explained Showroom samples, which would be held as Fixed Assets or already posted as Expense. You handle the Accounting in the manner that applies to the accounting, which is not the same as property tax reporting.

For Property Tax reporting, for my County, they will count lamps and staplers and trashcans. I buy these as Expense, but they see it as Real Property = tangible goods. They also examine the Design Library for engineers and architects. Now, they have different Classes for the property under both the County and the State, and the County might exempt up to the first $30,000 of "personal property" from their tax tables.

So, you don't have Inventory. You have samples on hand, which might already be written off as expense. Example: You bought materials and made an error on a sign. There is a ski bar near us with lots of signs on the wall, from closed businesses and from Mistakes, such as some church's image was carved out in mirror-image. Now that sign is in a bar on the wall of shame. The Sign company paid for the materials and labor, so it's already taken as cost for them. Whether they burned it, kept it, or let it be displayed, is not part of their Accounting.

The tax valuation regulations and your own Accounting are two different aspects of being in business. Do what applies for the accounting and do what applies for taxes. That way, you are never wrong.

Here is a typical reference that explains what things are categorized as in Los Angeles County for purposes of business tax, and the first $100,000 exemption. They even count the desk telephones, as I noted, under Property.

http://lacountypropertytax.com/portal/contactus/ppa.aspx

That's why you might have written off damaged inventory as waste, or used for sample purposes (machine calibration and alignment) and then kept it on hand as show-and-tell. That means it is not on the "books" at all. Yes, it is on the floor, so it counts as Property. They don't ask for the balance sheet.

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@capehnc wrote:

I don't want to pay personal property taxes on items that aren't technically inventory anymore. 

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I have not heard of personal property tax on inventory. Is that your state? How does it work? If it's a business, does it still apply even though it's "personal "?

In Washington State there is no personal property tax for business inventory. Business inventory (products) for sale become taxable when they are sold and paid for (on a cash basis), but this is unrelated to Personal Property Tax. A periodic Washington State B&O Excise Tax Return is filed where tax is paid on gross sales less applicable credits and deductions. I believe that the other Accountant was stating that business display products that will not be sold may not be considered inventory at all, but rather a fixed asset or other business operating expense. Property of the business that is not inventory for sale can be considered tangible personal property in some states.

What we have in this topic is a "not inventory" condition. Example: I have a Granite Monuments client. When you go to their office space, you see on display urns, plaques, and materials. Some stuff is already engraved as examples; obviously, that is Samples, not in stock as inventory and cannot be sold. There also are pieces of blank stone and examples of urns, etc, which are in stock and can be bought, or bought and left or have engraved or etched. This is product to sell, but on the floor to show, as well. You track them differently in the accounting.

And some tax authorities will value everything they see, no matter how you track it in the accounting; but they have a form you fill in and their form might have a provision for not taxing Products on hand to sell (inventory) and only "Furniture and Fixtures and Supplies" which would include these Sample Pieces that are on display. And as I pointed out, my County also counts trash cans and desk phones and desk lamps. And the forms might include an exemption for a minimum, as mine does.

Then, the Business Property tables might have Classes, such as Rolling stock is not taxed the same as a Computer server farm, or the same as a Restaurant that has freezers, stoves, tables and chairs, etc.

 I offered Los Angeles as an easy example.  Washington State has similar rules: "Personal property is also subject to property tax when used in a business activity. Personal property includes machinery, equipment, furniture and supplies. The tax rate for real and personal property is the same."

"Every person who uses personal property in a business or has taxable personal property must complete a Personal Property Tax listing form by April 30 each year."

In my State, you get a questionnaire for Livestock, too.

If in doubt, contact the personal property tax division for your Country to clarify whether sample product inventory that will not be sold is considered a tangible personal property of the business that is subject to personal property tax. It seems like a non-sales inventory asset to me, as you would sell it if you were not using it to display your work. Furthermore, it is feasible that you could re-condition the product for sale if you chose to, thus it is an asset of the company that is not presently for sale.

Hi -- If we are selling showroom inventory to a customer on delayed terms, would that be booked like a regular sale?  The catch is that if they hit a certain annual sales level, we would credit them for the sale.  Any guidance would be appreciated -- I am new to accounting!  Thanks!

How does one move existing inventory from Inventory Asset to the new sub account No-Sale Inventory? For example I purchased 5 flashlights and want to take one and display it in a show case.  Thank you.

Thanks for joining this forum, @mattg19. 

In QuickBooks, you can only change a service item to an inventory or non-inventory item. Here's how: 

1. Go to the Settings menu, then select Products and Services.
2. Loicate the non-inventory or service item you want to change.
3. Click Edit in the Action column, then choose Change type.
4. Select Inventory, then follow the steps to set the item up as a non-inventory or service item.
5. Click Save and Close.

For further insights about this process, you can visit this article: Change product and service item types in QuickBooks Online. 

Here's another article that can help you learn in generating useful insights into the products you buy and sell and its status: Use reports to see your sales and inventory status.

Get back to me if you have additional concerns about managing your inventories. I'll be around to guide you again.

@mattg19 

There is no entry that needs to be made when an item is being used as a display. It's still regular inventory at that point.  When you decide to either dispose of it or sell it as a discount, then you make the appropriate entry.  If you later sell it at a discount, no entry is needed.  If you dispose of it, then you would make an inventory quantity adjustment and assign the adjustment to COGS.