Another look at simplified LIFO for retailers.

• Author: Holt, Jeremy K.

The tax benefits available under the LIFO inventory method are well established. Yet in recent years, expectations have sometimes surpassed results. Some retailers have been disappointed by less than anticipated benefits, while others have seen LIFO actually create tax liabilities. Still others have chosen not to elect LIFO because they were concerned about administrative difficulties or adverse financial reporting effects.

Many taxpayers are not maximizing the tax benefits of this inventory method and are paying more taxes than necessary. There have been several changes in the LIFO area in the last 10 years that have proved beneficial to retailers. Perhaps it is time to reexamine the various tax alternatives under the LIFO method.

In 1981, the IRS adopted Regs. Sec. 1.472-2(e)(3), which substantially reduced the potential adverse financial reporting impact of LIFO. While the LIFO method is still required for financial reporting if it is used for tax purposes, supplemental disclosure of non-LIFO information is permitted. In addition, identical LIFO methods are not required. Thus, a company could adopt the most beneficial LIFO methodology for tax purposes while using a more conservative method for financial reporting purposes. For example, a government index could be used for tax purposes and an internally generated index for financials. Therefore, if the financial reporting requirement was the only reason for not electing LIFO, it may be wise to reconsider.

In 1982, the Service published Regs. Sec. 1.472-8(e)(3) allowing any taxpayer (other than department stores eligible to use the Bureau of Labor Statistics' (BLS) Department Store Indexes) to use government indexes for dollar value LIFO calculations. Computing a LIFO index is generally considered the most difficult requirement of LIFO. Under these regulations, a taxpayer may now use the Consumer Price Index (CPI) or the Producer Price Index (PPI) published monthly by...