Tag Archives: Lifo

 

Equipment Manufacturer

A manufacturer of safety and personal protective equipment had been experiencing steady increases in material costs. The company had utilized the LIFO inventory method in the 1990s, but elected off of LIFO due to the complexities associated with the method. They decided to consider LIFO again as a means to free up cash to reinvest in the business for the 2010 tax year. A no cost analysis by SourceCorp Professional Services showed the company was experiencing 4% inflation, which yielded a first year LIFO Reserve of over $4.1 million – a tax deferral of over $550,000 in year one, which the company used to expand their business. They were also able to eliminate the concerns and complexities presented with their prior LIFO method by utilizing SourceCorp’s services.

Distributor

An aluminum distributor with roughly $20 million in inventory had been on LIFO for 15 years. While their current method had produced a sizeable LIFO Reserve over the years, the company was open to considering other LIFO methods. By changing to the IPIC LIFO method, the company was able to increase their LIFO Reserve by $2.5 million above their prior method for the 2010 tax year. The audit protection received as a result of the method change proved to be an additional benefit of electing IPIC.

Companies using the LIFO method to value inventory are likely aware of the challenges the 71-yearold accounting method currently faces. What they may not know, however, is that now is the perfect time for LIFO users to evaluate an alternative LIFO method that could potentially increase their LIFO benefit. This methodology is an IRS-approved LIFO method known as the Inventory Price Index Computation (IPIC) method, and it has helped thousands of companies increase their LIFO benefit.

Unlike traditional LIFO methods, IPIC measures inflation based on published indexes that are tracked and maintained by the Bureau of Labor Statistics (BLS). In most cases, the published indexes result in higher inflation than companies experience internally.

In addition to increased tax savings, there are other significant benefits to the IPIC method. First, companies that switch to the IPIC method are afforded audit protection by the IRS for their prior LIFO method. Second, since inflation is not measured based on changes in actual costs for each item under IPIC, the complexities of determining an appropriate year beginning cost for new items each year is eliminated. Third, moving to the IPIC method is an automatic change in accounting method, thus LIFO taxpayers have until the extended due date of their tax return to make this change.

With all of the advantages offered by the IPIC method, I still have companies ask if changing to the IPIC method makes sense given the current challenges LIFO faces. What many consider to be the greatest threat to LIFO is the looming International Financial Reporting Standards (IFRS) convergence. Since IFRS does not recognize LIFO, many assume that IFRS adoption will mean an immediate end to LIFO.

Chandry Jimenez, Director of LIFO Services

While there is currently no timetable for convergence of privately-held companies, there is hope for LIFO users if convergence does transpire. The first possibility is that an exception to IFRS in the U.S. could be made to allow companies to continue using LIFO for financial reporting. While IFRS is a world-wide reporting standard, what you may not know is that most developed countries using IFRS have made exceptions to the “standards” by editing or removing portions deemed undesirable. Another possibility in favor of LIFO is an elimination of the conformity requirement altogether. Such a proposal was recently presented to the Treasury Department and is currently under review.

In spite of the challenges LIFO faces, we continue to evaluate the IPIC LIFO method for companies to help increase their cash flow. We’re seeing more advantageous results in a variety of industries, most recently in manufacturing, distribution and retail sales of food, fuel, chemical products and metal products. If you’re on LIFO and pressed for cash, now is the perfect time to consider the IPIC method.

Chris Henderson

Chris Henderson, VP, Operations

The IRS recently announced that it will suspend the examination of auto dealership Code Sec. 263A issues until further guidance is published. Originally, these examinations had been suspended for the September 15, 2009 – December 31, 2010 period. Now, however, it appears that additional guidance will not be issued until sometime after the end of the year, so the suspension has been extended.

UNICAP Code Sec. 263A requires auto dealerships to include in their inventory costs all direct and indirect costs properly allocated to property that is inventory. The IRS rejects auto dealers self-developed methods of capitalizing additional Code Sec. 263A costs. Specifically, the IRS detailed in Technical Advice Memo PLR 200736026 (TAM) how auto dealers should handle costs.

  • Installation by the dealer or a subcontractor of parts to new and used vehicles owned by the dealer constitute production activities.
  • Repair or installation of parts on customer-owned cars should be treated as handling costs.
  • Leased vehicles constitute non-retail transactions

Auto dealership Code Sec. 263A issues are classified as Tier III due to a high level of taxpayer noncompliance. To encourage voluntary compliance, in October 2009, the IRS announced the current suspension of examinations. The IRS expects that all auto dealers will be required to make an accounting method change (i.e. file Form 3115) to conform to the methodology outlined in the TAM. Due to a lack of clear guidance and onerous information gathering requirements, many auto dealers have been reluctant to revise existing UNICAP calculations.

The forthcoming IRS guidance is expected to address many of the more ambiguous issues outlined in the TAM. Prior to this announcement, SourceCorp expected to have a comprehensive solution to market by late 2010. We continue to develop the offering and revise as necessary, as soon as further guidance is published, in order to provide a turn-key solution once the audit suspension period is lifted.

Please feel free to ask questions or leave comments on this blog, or join our Cover it Live discussion on September 1, 2010 at 2:00 p.m. CT.

Great article from CFO Magazine.

http://www.cfo.com/article.cfm/14508745/c_14509253

Legislative outlook:

Neither house or Congress has moved meaningfully on a Congressional Budget Resolution beyond the Senate Committee action which we last reported to you, and Speaker Pelosi indicated this week that the House is unlikely to consider a budget this year. If that proves to be the case, the Senate will not be able to consider tax legislation under the filibuster-proof Reconciliation procedures this year, thereby creating a 60-vote threshold for any tax legislation which has serious opposition. That would be very good news for us.

While major tax legislation is expected at some point this year, thus far both houses remain focused on passing the tax extenders bill, extending expiring (or expired) tax provisions like the R&D tax credit, deductibility of state sales taxes, etc. There are a lot of additional issues that are wrapped up in the ongoing discussion of the extenders legislation, but for our purposes the concern is the “pay-fors” or tax increases that might be considered to help offset the revenue loss caused by extending the expiring provisions. LIFO has not been discussed as one of the pay-fors at this point, and Coalition meetings on Capitol Hill have provided no concrete suggestion that we are at risk in the extenders bill. We continue to watch and monitor those discussions closely, and Hill meetings continue, but so far the news has all been reassuring.

Once the extenders bill is finally enacted, we expect Congress to turn to other tax measures, in effect forced to that discussion because of the expiration at the end of this year of most of the tax cuts enacted in 2001 and 2003, including marginal tax rates at all levels and reduced rates on dividends and capital gains. The expiration at the end of last year of the “death tax” is also driving dicussion of tax legislation later this year. With many in Congress intent on extending some of the exipriring tax rate reductions beyond their scheduled exipration at the end of this year, Congress will need huge “pay-fors” to offset those continued reduced rates, and it is very possible that LIFO repeal will be discussed in that context. We remain committed to protecting LIFO, but we are by no means out of danger yet.

Home state meetings with Finance and Ways and Means members:

To that end, we would again encourage all of you to request and/or ask your members to request meetings with members of the Senate Finance and House Ways and Means Committees (or their key staff) while they are at home during the Memorial Day recess (May 21-31). There is no doubt that the many meetings you all scheduled and attended in home state offices last summer were critical in persuading key members of the House and Senate not to pursue LIFO repeal. Those meetings could make the difference again this year. You can find the list of state and district offices of all the relevant committee members at the links below. Please help with this effort, and please provide any feedback you get from calls or meetings you schedule/attend.

Financial Executives International wants any changes to corporate tax rates to be considered within a broad review of the tax code. The trade group is asking Congress to reject the proposed changes in President Obama’s budget. It fears that the changes will unfairly impose extra costs on U.S. businesses. Read More →

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