SUMMARY OF IRS LIFO METHOD ALTERNATIVES :

 

A. 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.

 

B. Dollar value method - A short-cut cost flow method which measures inventory layers in terms of dollars rather that 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 as of the end of the prior year to determine whether the inventory levels have increased or decreased.

1. LIFO election scope - Can be selective for each corporation with these exceptions:

a. Manufacturers using NBU pools

b. IRS TAM 200603027 would prevent selective elections within IPIC pooling method pools

2. Item definition method:

a. Individual inventory items

b. Fungible commodities measured in gallons, pounds, board feet, etc.

3. Inflation comparison period:

a. Link-chain method-Compare current year end prices to prior year end prices

b. Double-extension method-Compare current year end prices to base year prices

4. Current-year cost and layer valuation method:

a. Latest acquisitions(FIFO)

b. Earliest acquisitions

c. 12 month moving average

d. Other method that clearly reflects income

5. LIFO pooling method:

a. Resellers (retailers & wholesalers) - By line, type, or class of goods

b. Manufacturers:

i. Natural Business Unit(NBU) pools(separate pool required for parts purchased for resale)

ii. Raw material content pools

iii. Multiple pools

c. Any IPIC method taxpayer-IPIC pooling method using PPI or CPI Major Groups (usually 5 or less pools)

6. Inflation measure source:

a. Internal indexes:

i. All inventory items used

ii. Representative Sampling(Index method)

b. External indexes:

i. BLS Department Store indexes (department stores only)

ii. IPIC method:

1. BLS Table selection:

a. CPI

b. PPI:

i. Table 6 unless there is a more appropriate Table 5 category

ii. Final or preliminary indexes

iii. Discontinued categories treatment-Compound inflation or Substitute Index method

2. Weighted average method for pool index calculations:

a. 10% method

b. Most Detailed Category method

3. Appropriate month selection:

a. Annually select appropriate month

b. One time binding selection of Representative appropriate month