In Finance, what is Mothballing?

Mothballing is the practice of putting functional equipment and facilities into storage so they are no longer being operated, but can be used again in the future. There are a number of reasons for businesses to engage in mothballing. This activity keeps the equipment and facilities under the ownership and control of the business while retiring them from current operation.

Operating costs can be high for many facilities. If a company is not using a facility as heavily, has reason to believe that a facility will enter a period of inactivity, or needs to cut operating costs, it can mothball the facility. Likewise, companies can choose to take a facility out of commission seasonally, retaining ownership but not using it when it is not needed. Facilities can also be mothballed when a company thinks it might shut down, but does not want to make immediate decisions.

In mothballing, equipment and the facility are carefully shut down and prepared for storage. Things may be partially disassembled, oiled, wrapped, and otherwise treated so they will remain in operating condition while not in use. Power can be cut to a facility or if limited power is needed, systems can be shut down to reduce the utility load while still ensuring that power gets where it needs to go. The mothballed facility can have guards and a security system to keep it safe, but the regular staff are dismissed because their services are no longer needed.

Sometimes, companies mothball facilities indefinitely. In other cases, mothballing is scheduled or it is conducted with the goal of keeping a facility safe and secure while seeking out a buyer. In these cases, the company may open up the facility for inspection as requested by buyers. Buyers making bids are aware of the mothballing and can check to confirm that equipment and supplies are safely stored so they can be taken out of storage and used immediately once the sale has been completed.

For tax purposes, mothballing can be handled in various ways. Companies do have some costs associated with maintaining and securing the facility and these are legitimate business expenses. It is also important for companies to take steps to make it clear that they are not abandoning facilities. If facilities are abandoned and become derelict, there is a risk that government regulators will step in and order a company to make repairs or confiscate the property so it can be secured and then sold.