Well... If you are a small business (under 10 million average gross receipts) you do not have to account for inventory if you are using cash basis. That means that you do not use the inventory section on 1040 Sch-C, page 2, part III. Rather you show an appropriate expense for materials or whatever in 1040 Sch-C, page 2, part V. This then will give you your loss without mudding up the question of inventory on hand.

With regards to depreciation on merchandise (inventory), you don't depreciate merchandise that is held for sale. If you are recording inventory, your only option on merchandise is to sell it, mark down to fair market value if less than cost, or write it off as obsolete. If you don't use part III and instead use part V, you have expensed (write-off) the merchandise so there is no more accounting for it. It is done and gone as far as your books and tax return is concerned so when you do sell it you will have 100% income with no deduction in that year of sale.

So maybe it is better to call it inventory this year (part III) with zero loss and take the deduction or cost write-off when you actually sell it. The IRS likes the inventory method better and can actually reclassify it as inventory disallowing your loss if they can show that it causes your income to not be reflected properly (not likely that they would do that in a small $ case unless you are audited).

my 2???