** PLEASE DESCRIBE THIS IMAGE **
 

Good Candidates to Use LIFO by Industry


Supermarkets


Over 90% use LIFO and most have used LIFO for many years. Most publicly traded companies use internal indexes for financial reporting and IPIC for tax. Until a few years ago, most supermarket chains used Consumer Price Indexes (CPI) but some companies (and most of the large companies) have switched to using Producer Price Indexes (PPI) because PPI inflation has been consistently higher for the past several years even though more work is required to use PPI indexes (because there are more PPI categories). Average CPI inflation has been consistently 2% +/- 1% for the past 20 years. Some companies exclude certain departments from their LIFO elections. Meat, produce, bakery and deli are the most commonly excluded departments. Companies in this industry will maximize their tax savings with all goods on LIFO because virtually all goods they carry have price inflation over time. The breakdowns of inventory by CPI or PPI category required for the IPIC method for store inventories is made using physical inventory counts for most companies in this industry.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 02 – Processed foods & Feeds
0.5%
-6.2%
4.2%
-0.6%
0.3%
2.6%
CPI – SAF11 –¬†Food at home
-2.0%
-0.4%
3.7%
0.4%
0.6%
2.0%

Drug stores


Almost all large chains use LIFO and most have been on LIFO for many years. The notable exception is CVS. This industry is one of the best candidates for use of LIFO because there has been consistently high inflation for many years. Most publicly traded companies use internal indexes for book and IPIC for tax. Until a few years ago, most drug store chains used CPI indexes but some companies (and most of the large companies) have switched to using PPI indexes because PPI inflation has been consistently higher for the past several years even though more work is required to use PPI indexes (because there are more PPI categories).

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI -0638 Pharmaceutical preparations
7.6%
8.7%
9.9%
8.7%
7.4%
6.5%
CPI – SAM1 Medical care commodities
4.7%
1.5%
4.8%
3.6%
2.6%
2.7%

Convenience stores


The majority of the large chains use LIFO. Most of these companies that have been on LIFO for many years have substantial LIFO reserves because of the significant inflation in fuel and tobacco. The average inflation for these companies varies a lot depending on whether fuel is on LIFO. The staple goods inventories (those excluding fuel and tobacco) have averaged about 2% inflation for many years. Having fuel on LIFO is a roller coaster because of price volatility but those having fuel on LIFO for many years have enjoyed large tax savings.


Auto dealers


The majority of auto dealers use LIFO. Most of these LIFO taxpayers use the Alternative Methods which the IRS has provided as a shortcut method for which the inflation indexes are calculated using the base model prices. Auto dealer LIFO inflation calculated using the Alternative Methods has averaged over 2% over the past 20 years. Use of the IPIC method is rare because automobile CPI and PPI indexes have been flat for the past 10 years.


Auto parts dealers


The prevalence of LIFO usage for this type of business is unknown. There has been substantial CPI inflation for parts and tires. The tires PPI inflation has been even better than CPI inflation for tires but the PPI parts inflation has been a lot less than that for the CPI. Retailers can use CPI or PPI indexes but all others must use PPI indexes.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 071201 Tires
0.2%
-3.0%
-3.8%
-2.2%
-1.7%
2.2%
CPI – SETC02 Vehicle accessories other than tires
0.0%
0.0%
1.7%
0.8%
1.2%
2.8%
CPI -SETC01 Tires
-1.9%
-0.6%
-1.9%
-1.5%
-1.6%
1.2%

Heavy truck & trailer dealers


The prevalence of LIFO usage for this type of business is unknown but these are very good LIFO candidates. Trucks less than 14,000 lbs. GVW should not be on LIFO as there has been 9% deflation the past 10 years.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 141106 Trucks, over 14,000 lbs GVW
2.1%
2.8%
1.1%
2.0%
2.1%
2.7%
PPI -1414 Truck trailers
-0.6%
1.8%
1.6%
0.9%
1.0%
1.8%

RV dealers


The prevalence of LIFO usage for this type of business is unknown. There are specific IRS rules regarding lower-of-cost-or-market(LCM) reserves for this type of business that preclude any substantial LCM writedowns. The LIFO reserves for this type of company that has used LIFO for at least several years would be substantially greater than any lower-of-cost-or-market(LCM) reserves that would be allowable by the IRS.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 1415 Motor homes built on purchased chassis
2.2%
1.4%
0.0%
1.6%
0.9%
1.2%
PPI -1416 Travel trailers and campers
0.6%
2.9%
3.1%
2.2%
2.3%
2.2%

Farm equipment dealers


The prevalence of LIFO usage for this type of business is unknown. The large manufacturers of this type equipment such as Deere use LIFO and have large LIFO reserves because there has been substantial inflation historically.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 111 Agricultural machinery and equipment
1.3%
1.0%
1.2%
1.2%
1.2%
2.3%

Construction equipment dealers


The prevalence of LIFO usage for this type of business is unknown. The large manufacturers of this type equipment such as Caterpillar use LIFO and have large LIFO reserves because there has been substantial inflation historically.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 112 Construction machinery and equipment
1.0%
0.9%
1.9%
1.3%
1.8%
2.2%

Liquor, beer or wine stores


The prevalence of LIFO usage for this type of business is unknown. The large manufacturers of these types of beverages use LIFO and have large LIFO reserves because there has been substantial inflation historically.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016
PPI – 026101 Malt beverages
2.9%
1.1%
0.7%
0.7%
1.6%
2.7%
PPI – 026102 Distilled and bottled liquor exc brandy
-1.3%
-1.0%
-1.8%
-1.4%
-0.9%
1.2%
PPI – 026104 Wines, brandy and brandy spirits
0.9%
0.3%
-0.9%
0.1%
0.7%
0.9%
CPI – SEFW01 Beer, ale & other malt beverages at home
1.9%
1.1%
0.7%
1.2%
1.5%
2.2%
CPI – SEFW02 Distilled spirits at home
0.3%
-0.4%
0.9%
0.3%
0.5%
0.7%
CPI – SEFW03 Wine at home
-0.3%
-1.2%
0.6%
-0.3%
0.1%
0.5%

Building products & hardware stores


Whether this type of company is a good candidate to use LIFO depends on the diversity of products carried. There has been more deflation than inflation in recent years for softwood lumber. There has been good inflation for most other goods these stores carry in recent years.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016

PPI – 0811 Softwood lumber

8.8%

-5.7%

0.1%

0.9%

5.1%

2.2%


Sellers of Steel Products


We don’t have good statistics on LIFO usage for these companies, but we believe that more use LIFO than do not. While steel prices have increased a lot over the years, the increases have not been consistent. The steel mill product (PPI 1017 code) prices, increased by an average of 5% per year from 1939 to 1981 but there was virtually no inflation for the next 20 years. Beginning in 2002, these prices have increased significantly, but only in the even years. 1017 Steel mill PPI inflation rates for the past several years are: -6% in 2001, 11% in 2002, 5% in 2003, 48% in 2004, -5% in 2005, 11% in 2006, 1% in 2007 and 43% for the eight months ended August 2008.

Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Annual average
inflation for
3 years ended
12/2016
Annual average
inflation for
5 years ended
12/2016
Annual average
inflation for
10 years ended
12/2016

PPI -101 Iron and steel

6.0%

-23.5%

-0.5%

-2.2%

-2.1%

0.7%

PPI – 108 Miscellaneous metal products

-0.4%

-1.6%

0.4%

-0.6%

-0.1%

1.3%


Electrical supply retailers and wholesalers


There has been about 100% inflation in copper wire over the past four years. This and the fact that there has been good inflation for other goods this type of company carry make these companies good LIFO candidates.


Farm and ranch supply stores


This type of retailer has had 3% or more inflation for the past several years and they are excellent LIFO candidates.


Sporting goods stores


There has been good inflation in hunting and fishing sporting goods but there has only been about 3% PPI inflation in the past 10 years for other sporting goods. There has been some clothing and footwear inflation in recent years but only about as much as for sporting goods.


Dollar stores


Most of these retailers carry broad lines not a lot different than discount store chains like Wal-Mart except that they carry far fewer SKUs than the big box stores. Stores such as these are good LIFO candidates because the average PPI inflation has been about 2% in recent years for goods on LIFO. Goods that would be excluded from the LIFO election would exclude electronics and major appliances because of consistent deflation for these goods. PPI inflation has been flat for most Apparel categories for many years, so it does not make much difference if these goods are included in the LIFO election scope. PPI inflation has been much better than that for the CPI and BLS Department Stores indexes for the past 8 or so years.


Apparel stores

These have been poor LIFO candidates in recent years. There has been more CPI deflation than inflation in most categories for the past 10 years. There has been more PPI inflation but even the PPI inflation has been essentially flat for most categories.


Electronics stores

These are some of the worst LIFO candidates. There has been considerable deflation for radios, TVs, stereo equipment, PCs, PC software and other electronic gadgets. Major appliances have been deflationary also.


Furniture stores

There has been good inflation for most other goods these stores carry in recent years. Inflation for non-furniture household furnishing has been about the same as furniture and floor covering inflation has been as much or more as for furniture. Broad lines furniture stores should exclude electronics and major appliances from LIFO because of consistent deflation for these goods.


Category 12 months
ended
12/2016
12 months
ended
12/2015
12 months
ended
12/2014
Average annual
inflation for
3 years ended
12/2016
Average annual
inflation for
5 years ended
12/2016
Average annual
inflation for
10 years ended
12/2016
PPI – 121 Household furniture
0.6%
1.3%
1.2%
1.0%
1.2%
1.7%

Grocery and food product wholesalers and foodservice distributors


The greater the diversity of products, the more likely this type of company will be or should be on LIFO for the same reason most supermarkets use LIFO. It may also make sense for companies selling a limited number of products to be on LIFO. For example, there has been substantial PPI inflation over the years for beef products despite the fact that inflation is volatile. Whether a company that carries a limited number of products chooses whether they should be on LIFO or not depends on management’s acceptance of the unpredictability of the annual LIFO charge.