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Summary of IRS LIFO Method Alternatives


  • LIFO index computation method:
    • Dollar value method – A shortcut cost flow method which measures inventory layers in terms of dollars rather than physical units. Inventory items are grouped by pools and are priced in terms of each pool’s aggregate base year cost. The result is compared to each pool’s aggregate base year cost at of the end of the prior year to determine whether the inventory levels have increased or decreased.
    • Specific Goods Method – An approach to applying LIFO in which changes in the quantity of individual types of inventory are the basis for determining whether the inventory levels have increased or whether a portion of the existing inventory has been liquidated.
  • LIFO election scope: Can be selective for each corporation with these exceptions:
    • Manufacturers using Natural Business Unit Pools (NBU)
    • IRS TAM 200603027 would prevent selective elections within IPIC pooling method pools
  • Item definition method:
    • Individual items
    • Fungible commodities measured in gallons, pounds, board feet, etc.
  • Inflation comparison period:
    • Link-Chain Method- Compare current year-end prices to prior year-end prices
    • Double-Extension Method- Compare current year-end prices to base-year prices
  • Current year cost & layer valuation method:
    • Latest acquisitions (FIFO)
    • Earliest Acquisitions
    • 12-month moving average
    • Other method that clearly reflects income
  • LIFO pooling method:
    • Resellers (retailers & wholesalers)- By line, type or class of goods
    • Manufacturers:
      • NBU pools (separate pool required for parts purchased for resale)
      • Raw materials content pools
      • Multiple pools
    • Any IPIC method taxpayer-IPIC pooling method using CPI/PPI major groups (usually five or less pools)
  • Inflation measure source:
    • Internal indexes:
      • All inventory items used
      • Representative sampling (index method)
    • IPIC method:
      • BLS Index Selection:
        • CPI
        • PPI:
          • Index selection:
            • Table 9
            • Table 11 (if more appropriate to use than Table 9)
          • Index timeframe selection:
            • Final Indexes
            • Preliminary Indexes
          • Discontinued categories treatment:
            • Compound inflation method
            • Substitute index method
      • Weighted-Average pool index calculation method:
        • 10% method
        • Most detailed category method
      • Appropriate month selection:
        • Annually select appropriate month
        • One-time binding selection of representative appropriate month