A precise understanding of inventory discrepancies and their accounting and tax treatment is essential for every company. The Slovenian Accounting Standards 2024 (SAS 2024) clearly define the obligation of proper inventory valuation and the treatment of shortages, surpluses, impairments, and related tax effects.
Is a shortage identified during an inventory count a tax-deductible expense?
According to SAS 2024, an inventory shortage is recognised as an expense when no responsible person can be identified. This means that the shortage is treated as an operating expense. This applies when the physical count reveals a lower quantity of materials than recorded in the accounting records. If properly documented, the discrepancy is recognised as an expense for accounting purposes.
From a tax perspective, the shortage is generally recognised as a tax-deductible expense when it is business-related, adequately documented and does not exceed typical or acceptable levels of inventory reduction. However, if circumstances indicate employee responsibility, deliberate misconduct or private use of materials, the tax treatment may differ significantly.
A write-off or shortage may be tax-deductible when the reduction in inventory results from ordinary business events such as damage, ageing, spoilage, evaporation or a confirmed shortage during inventory count. It is essential that all counts are properly documented and reasons for the write-off clearly stated.
It should be noted that tolerance limits may apply to certain types of shortages. Any amounts exceeding such limits are not tax-deductible. It is also important to distinguish between business-related shortages and private use, as private use of inventory may be treated as a supply of goods, triggering a VAT liability.
Is VAT on the identified shortage a tax-deductible expense?
Yes. VAT that must be charged due to the identified inventory shortage is a tax-deductible expense. A shortage is treated as if the goods were consumed for non-business purposes, which creates an obligation to account for VAT. Since the company cannot reclaim this VAT, it bears the cost directly. Under tax regulations, such VAT is treated as a tax-deductible expense.
Is offsetting surpluses and shortages during inventory allowed?
Offsetting surpluses and shortages is not allowed. An inventory count must show the actual status of each individual inventory item. Surpluses and shortages must be treated separately, as they represent different types of business events. A surplus increases inventory and income, while a shortage represents an expense.
An exception may apply only when the difference relates to the same item and results from a technical error, misclassification or duplicate entry. This, however, is not an offset but a correction of records.
Is the impairment of receivables tax-deductible when recognised?
Impairment of receivables at the time of recognition is not a tax-deductible expense. Although SAS allow impairments based on accounting estimates, tax law does not recognise these impairments until the receivable becomes actually uncollectible.
Tax deductibility arises only when specific circumstances occur, such as a completed bankruptcy without repayment, unsuccessful enforcement, confirmed compulsory settlement or duly proven limitation after active collection efforts. Until then, impairment is a non-deductible expense.
Why is annual inventory necessary?
The annual inventory is a key process that enables the company to determine the true status of its assets and liabilities and ensure the accuracy of financial statements. It verifies whether accounting records correspond to actual conditions and allows the company to identify shortages, surpluses, damage, obsolete or unusable inventory. Without inventory, financial statements cannot present a true and fair view of operations, which is essential for lawful and transparent reporting.
Legal basis for conducting the inventory
The annual inventory is not merely a recommendation of good practice but a legal obligation.
The Companies Act requires financial statements to present a true and fair view, which can only be achieved through an inventory count. The Slovenian Accounting Standards 2024, especially SAS 4 and SAS 1, require verification of actual inventory levels at year-end. The Accounting Act additionally mandates that all assets and liabilities must be counted at least once per year.
Impact of inventory on the tax return
Inventory has a direct impact on the calculation of the tax base, as discrepancies affect the company’s income and expenses. Shortages may be tax-deductible or non-deductible depending on their cause. When a shortage results from justified business reasons, it may be deductible; otherwise, it increases the tax base.
Write-offs and impairments reduce the book value of assets but are tax-deductible only if supported by appropriate evidence and documentation. Surpluses increase revenue because they represent previously unrecorded value. In certain cases of shortages, VAT must also be accounted for, creating an additional expense that is tax-deductible.
The annual inventory is therefore one of the key procedures linking accounting and taxation, ensuring correct and lawful corporate reporting.
Conclusion
Companies must pay particular attention to the correct treatment of inventory discrepancies, as accounting and tax rules do not always align. Proper documentation, familiarity with standards and understanding of tax implications are essential for reducing tax risks and optimising business performance. When dealing with shortages, surpluses, VAT treatment and impairments, cooperation with a qualified accounting professional is recommended to ensure compliance and optimal tax outcomes.
