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2021 LIFO Lookout
- Inflation is alive & kicking
- Federal reserve has raised its 2021 year end inflation forecast from 1.8% to 2.2%
- Massive amounts of government stimulus & proposed infrastructure spending expected to create above-average inflation in many industries
- Improved economic outlook & GDP growth expected to further accelerate price increases
- Inflation increased substantially in the final months of 2020 & is continuing so far in 2021 in many other industries
- Many of the raw commodities currently showing inflation will create ripple effect on intermediate & final demand goods, meaning a much wider range of goods are likely to have above average inflation for 2021 year end tax incentives
- Soaring fuel prices will create upward pressure on almost all goods as rising delivery/transportation costs will be realized in all industries
- LIFO’s here to stay
- Widespread IFRS adoption has not come to fruition in the U.S. & is not likely to ever cause LIFO to be impermissible under GAAP
- The misnomer that just-in-time accounting would eliminate inventories from the balance sheet has been widely debunked because:
- Use of this method only eliminates one of the three stages of production for manufacturers (finished goods), meaning raw materials & WIP will always be on the balance sheet to maintain adequate supply to maintain production of WIP & FG
- Wholesalers & retailers widely unaffected by this method since they must maintain a minimum base stock of inventory
- Used by tens of thousands of companies who have consistent inflation & sufficient inventory balances as a tax incentive
- Higher tax rates on the horizon
- Current political environment suggests increased corporate tax rates for both C-corps & S-corps will be enacted by Congress
- Increased tax rates make LIFO more valuable since after-tax cash savings from LIFO = tax rate * LIFO reserve
- Possible relief for qualified inventory liquidations: Could provide relief to LIFO taxpayers who suffered COVID-19 related inventory reductions that subsequently created LIFO income i.e. increased taxable income
LIFO Tax Incentives
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- During periods of rising costs, LIFO transfers inflated ending inventory from balance sheet to income statement by increasing cost of goods sold & reducing ending inventory balance
- Reduces taxable income in periods of inflation & can create material long-term after-tax cash savings
- Benefits grow in perpetuity & only decreases when there’s deflation or substantial inventory liquidation
- No changes required to accounting system as inventories maintained at same costs historically used & annual side calculation made to adjust inventories from cost (i.e. FIFO or average cost) to LIFO using contra inventory account called LIFO reserve
- Related LIFO calculation effort can be easily managed or outsourced altogether using LIFOPro’s complete range of solutions
Reduces taxable income in periods of inflation & can create material long-term after-tax cash savings
- Inventories maintained at same costs historically used & annual side calculation made to adjust inventories at cost (i.e. FIFO or average cost) to LIFO cost using contra inventory account called LIFO reserve
- Benefits grow in perpetuity & only decreases when there’s deflation or substantial inventory liquidation
- Quick LIFO tax incentives formula:
- CY Taxable Income Reduction (LIFO expense) = Current Year Inflation Rate * Prior year ending inventory balance @ cost (i.e. FIFO, average cost)
- CY After Tax Cash Savings = Current Year LIFO Expense * Tax Rate
- LIFO tax savings example:
- Inputs
- Year end FIFO balance: $10M
- Current year inflation rate: 2.5%
- Tax rate: 30%
- Outputs:
- CY Taxable Income Reduction (LIFO expense): Year end FIFO balance * Current year inflation rate = $250K ($10M * 2.5%)
- CY After Tax Cash Savings: LIFO Expense * tax rate = $75K ($250K * 30%)
- Inputs
Top LIFO Candidates
- In general:
- Almost any industry other than consumer electronics are good LIFO candidates stand to benefit from tax incentives from LIFO
- Includes manufacturers, wholesalers & retailers
- Top LIFO candidates by industry/primary business activity
- Supermarkets & convenience stores
- Dealerships
- Auto dealers
- Ag/farm machinery & equipment dealers
- RV & powersport dealers
- Construction machinery & equipment dealers
- HVAC & plumbing equipment/supplies manufacturers, wholesalers & retailers
- Alcohol manufacturers, wholesalers & retailers
- Home supply, building supply & hardware stores
- Furniture manufacturers, wholesalers & retailers
- Plastic resins & product manufacturers, wholesalers & retailers
- Chemicals manufacturers/wholesalers
- Metal/metal products & machinery manufacturers/wholesalers
- 2021 Top LIFO candidates
- Metals & metal products
- Lumber & wood products
- Chemicals & allied products
- Processed foods & feeds
- Rubber & plastic products
Optimization Strategies for 2021
- Tax savings maximization
- Switching from internal to external indexes (IPIC CPI/PPI)
- Expanding LIFO election scope for maximum tax incentives
- Reducing the number of LIFO pools
- Best LIFO practices
- Correcting calculation errors, including:
- Increment & decrement calculation errors
- Cumulative index calculation errors
- Switching from double extension to link chain
- Switching from dual to single index method
Automation & Outsourcing Opportunities
- Software
- Replace manual spreadsheet LIFO calculations with software to eliminate calculation errors & guarantee accuracy
- Simplify calculation procedures & reduce time spent on LIFO
- Improve internal controls, reduce financial statement audit risk & substantive testing
- Standardize LIFO policies & procedures to safeguard against employee turnover & simplify training procedures by leveraging software
- Turnkey outsourcing solutions
- Completely eliminate the hassle of calculations while growing & maintaining your LIFO tax savings
- Minimize time spent on LIFO to sending year end inventory documentation, reviewing LIFOPro reports & completing journal entries
- Improve internal controls, reduce financial statement audit risk & substantive testing
- Comes with the assurance of a SOC 1 Type II report & 40 hours audit support
Key Takeaways for 2021
- Companies not on LIFO:
- Get a complimentary LIFO Election Benefit Analysis Report
- Get the most accurate, in-depth LIFO cost vs. benefit analysis that’s only available from the LIFO experts
- LIFOPro runs a 20 year pro forma LIFO calculation to:
- Identify if your company’s product mix has historically provided sufficient inflation to warrant ever making a LIFO election
- Quantify what the long-term benefits of LIFO could bring in the future based on the historical results
- A current year LIFO Calculation estimate is also made to project the tax savings that could be achieved if LIFO were elected this year
- Includes LIFOPro’s recommendations & proposed costs for outsourcing your LIFO calculation or licensing our software
- Get a complimentary LIFO Election Benefit Analysis Report
- Companies on LIFO:
- Get a complimentary LIFO Calculation, Methods & Best Practices Review Report
- LIFO calculation reviewed for accuracy using LIFOPro software to maximize tax incentives
- Receive in-depth analysis & pro forma LIFO calculation comparisons of present vs. proposed methods from the only LIFO experts
- Identify opportunities for maximizing tax deferral & reducing IRS audit risk
- Recommendations, requirements & steps for making changes
- Includes sample LIFOPro reports using your company’s actual LIFO data
- Also includes software license & turnkey outsourcing solutions cost estimates
- Trial the LIFOPro software
- Plug & play using your company’s actual historical LIFO data
- Run parallel manual calculations & automated calculations in software to compare the results
- Quantify amount of time savings from automating calculation
- Identify opportunities for improving reporting transparency & simplifying documentation
- Get a complimentary LIFO Calculation, Methods & Best Practices Review Report
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