Frequently Asked Questions
Your clients appear to be the who’s who of the Fortune 500. Do you provide services or software to smaller companies and are these services affordable?
We serve numerous companies with less than $10 million in inventory value. Our extensive experience enables us to be as efficient as possible and charge the lowest possible fees.
We can outsource our LIFO calculations to other service providers. Is your firm the only company that provides a LIFO software licensing option?
There are two vendors that sell auto dealer LIFO calculation software. Other LIFO service providers have attempted to develop non-auto dealer LIFO calculation software in the past but they were not successful. Some companies may want to outsource their LIFO calculations but many corporations want to use software to make their LIFO calculations in-house. LIFO-PRO has over 30 clients that were once clients of another LIFO service provider that now use our services. LIFO-PRO’s clientele do not switch from using our services to that of a multinational company.
A CPA firm told us that they have software that makes non-auto dealer LIFO calculations. Your company’s web site says that your LIFO-PRO program is the only such software.
LIFO-PRO is the only non-auto dealer LIFO calculation software with a menu-driven user interface. There are a number of LIFO calculation Excel templates in use but it is a real stretch to call this software because:
- PPI and CPI index lookups are not automated and 10% method calculations are manual; these cannot be automated in a spreadsheet
- Updating of LIFO layer histories is not automated and a complete set of reports are not automatically generated
- Report printing is not automated
We are fed up with using spreadsheets for LIFO calculations but we cannot decide whether outsourcing our LIFO calculations to your firm or using the LIFO-PRO software is better for us.
The more frequently you make LIFO calculations, the more likely you would want to use the software. For example, if you make midyear calculations quarterly for financial reporting or for tax provision or quarterly payments estimates, you may be a good candidate to use the LIFO-PRO software. Corporations that have separate LIFO pools for a number of different legal entities are more likely to want to use the software.
What services do you provide to CPA firms?
The most common service we provide to CPA firms is what we call our Service Bureau for which we are provided a LIFO layer history in the first year in an Excel file listing the year and inventory balances by PPI or CPI category in the first year and succeeding years.
Other services we provide CPA firms include:
- Preparation of forms 970 and 3115
- Pro forma IPIC method LIFO calculations and other LIFO pre-adoption analysis
- LIFO best practices review
- Assignment of proper PPI and CPI codes to inventory items
- We have several CPA firm clients who have purchased a license to use our software and they use it to make LIFO calculations for a number of their clients
What type of company should adopt LIFO?
Companies that possess these attributes are good candidates to use the LIFO method:
- Profitability or the expectation of future profitability and the desire to reduce taxable income
- Consistent inflation
- Significant inventories
Significant LIFO reserves can be generated without having huge amounts of inventory if there is more than a nominal amount of annual inflation. A reliable predictor of the amount of annual income tax deferral from use of LIFO is beginning of year FIFO inventory balance times the current year inflation rate. As an example, a company with $2 million in FIFO inventory and 2% annual inflation would increase their year-end LIFO reserve by approximately $40,000 per year.
What type of company should not adopt LIFO?
Companies with consistent deflation should not use LIFO. We believe the companies with very volatile prices for significant portions of their inventory are not good LIFO candidates. High inflation during the year can cause a big increase the LIFO reserve but big decreases in inflation are likely in subsequent years and using LIFO can be real roller coaster. Companies with commodities inventories should only adopt LIFO if they are prepared to terminate their LIFO election if there is enough deflation such years to create negative LIFO reserves (LIFO inventory greater than FIFO inventory). If a company wants to terminate their LIFO election before they have used the LIFO method for five years, this is an advance approval tax accounting method change for which the IRS user’s fee is about $9,000. The IRS rules allow companies to use the LIFO inventory method selectively, that is for some inventories but not others. For example, many convenience store chains that have gasoline inventories do not use the LIFO method for gasoline but use LIFO for merchandise sold in their stores (cigarettes, food and beverages, etc.) which has a good history of inflation over the years.
What are the pros and cons of the specific goods LIFO method (“unit LIFO”)?
This was the only LIFO method allowed by the IRS until 1947 but this method should never be used because of the burdensome record keeping requirements and the fact that the taxable income deferral using this method is only a fraction of the deferral achieved using a dollar-value LIFO method. This is a link to our blog article addressing this question:
What are the pros and cons of using the double-extension LIFO method?
The double-extension LIFO method should never be used. We recently wrote a 27 page article describing in detail why this method is completely unreliable for purposes of measuring LIFO inflation and why this method should not be considered a permissible method by either the IRS or GAAP. This is a link to Lee Richardson’s article addressing this question:
What are the pros and cons of the using the IPIC LIFO method?
Advantages of using the IPIC LIFO method include:
- Good possibility of greater inflation than internal index method
- Manufacturers LIFO inflation should be less volatile than if an internal index method is used
- IPIC is a simpler method and less prone to index calculation errors
- A change to the IPIC method provides audit protection which is very important for a substantial number of LIFO taxpayers using bad methods
- A change to the IPIC method is the only way in which a taxpayer using the double-extension method can make a change to the link-chain method as an automatic approval change
- Fewer LIFO pools are possible
A disadvantage of using the IPIC method is that once the method is used, it is not an automatic approval change to switch back to an internal index method if an internal index method had been used before the company change to IPIC method. What can be a disadvantage for some manufacturers is the fact that the different index categories published for their products is not granular enough. For example, we have had client that had to use a nonferrous metals PPI code because there is no indexes published for their specific metal for that particular stage of production.
Can a LIFO method be used for tax purposes that is different than the LIFO method used for financial reporting?
Yes, the “LIFO conformity rule” which is contained in Reg. § 1.472–2(e) were amended in 1981 to specifically permit the use of book LIFO methods that are different from IRS Regs. methods. The most common book v. tax LIFO methods difference is companies using the IPIC method for tax purposes and an internal index method for financial reporting purposes.
Will inflation be higher using IPIC LIFO compared to internal indexes?
Over time, for retailers and wholesalers, the IPIC method PPI inflation is usually higher than internal index inflation. For some companies, the actual price comparison may be very close to being the same between the two methods but there is an internal index inflation dilution factor that results from setting the prior year item cost equal to the current year cost for new items (the method used by most companies using an internal index method). This inflation dilution factor is described in our Reasons not to use LIFO internal indexes blog article (link provided below):
For manufacturing companies, there can be a substantial difference annual inflation between internal indexes and PPI indexes. Below is a link to a blog article which describes the reason for this and why using the IPIC method usually results in much less volatile LIFO inflation than for manufacturers using an internal index method:
Are CPI or PPI indexes better for maximizing tax LIFO benefits?
While there may be a few items for which CPI inflation has consistently been higher than PPI inflation, for most retailers, there is a long history of there being greater (and sometimes significantly greater) PPI inflation than CPI inflation. For example, for the dozen or so years ended in 2014, PPI inflation for supermarkets outperformed CPI inflation during that period.
FAQ’s page last updated September 21, 2016