Changing method of accounting to comply with new retail-inventory method regulations.

• Author: Dell, Michael

In Rev. Proc. 2014-48, the IRS provides the exclusive procedures taxpayers must use to obtain consent under Sec. 446(e) to change a method of accounting to comply with the recently issued final regulations (T.D. 9688) on the retail-inventory method of accounting. The final regulations detail the proper calculation of ending inventory values under the retail-inventory method, and provide alternative calculation methods for taxpayers using the retail-lower-of-cost-or-market (retail-LCM) method of accounting to account for margin protection payments.

Taxpayers using the retail-inventory method may have to file for an accounting method change. They should examine how they currently account for margin-protection payments and sales-based vendor chargebacics to decide whether they must make an accounting method change.

Background

The IRS issued final regulations (TD. 9688) on how to compute ending inventory values under the retail-inventory method. The final regulations are generally consistent with the proposed regulations, with a few clarifications and modifications, and could have a significant adverse effect on retail taxpayers that use the retail-inventory method FIFO lower-of-cost-or-market (LCM) method.

Rev. Proc. 2014-48

The procedure in Rev. Proc. 2014-48 applies to a taxpayer using the retail-inventory method that wants to make one of the following changes: (1) from adjusting to not adjusting the numerator of the cost complement by the amount of an allowance, discount, or price rebate that is required under Regs. Sec. 1.471-3(e) to reduce only cost of goods sold; or (2) from adjusting to not adjusting the denominator of the cost complement for temporary markups and markdowns.

For a retail-LCM taxpayer, the procedure applies when changing (1) from adjusting to not adjusting the numerator of the cost complement by the amount of a margin-protection payment; (2) from adjusting to not adjusting the denominator of the cost complement for permanent markdowns; or (3) from using one method for computing the cost complement described in Regs. Sec. 1.471-8(b)(3) to using a different method described in Regs. Sec. 1.471 - 8(b)(3).

For a retail-cost taxpayer, the procedure applies when changing from not adjusting to adjusting the denominator of the cost complement for permanent markups and markdowns.

The scope limitations in Sections 4.02(1)--(4) and (7) of Rev. Proc. 201114 do not apply for a taxpayer's first or second tax years beginning after Dec...