Complimentary Offerings

• Features
  • Current year pro forma LIFO calculations
    • Using internal inflation measurement source (internal indexes)
    • Using external inflation measurement source (external indexes; aka IPIC method)
  • 20 year pro forma LIFO calculations
  • Submethodology benefit analysis comparisons
  • Proprietary grading & scoring system based on pro forma calculation results
  • How LIFO Works Appendix
• Benefits
  • Quantify current year taxable income reduction from electing LIFO for the upcoming year end
  • Comprehensive, comparative calculation results provide complete range of calculation options in order to identify methods that will yield most advantageous tax benefits
  • 20 year pro forma calculations provide inflation trends needed to determine whether consistent & sufficient inflation has historically existed
  • Receive objective advice regarding whether your company is a good LIFO candidate & if a LIFO election is recommended
  • How LIFO Works appendix provides valuable information regarding everything you need to know about electing LIFO, including implementation steps & requirements
  • Includes sample LIFOPro report package & turnkey outsourcing solutions fee quote

• Required LIFO election benefit analysis documentation:
  • Current & prior period’s item detail reports (Also known as stock status or inventory valuation report)
  • Combined federal & state tax rate (optional; tax savings will be estimated using range of tax rates if not provided)
• See our documentation request listing here: LIFO Benefit Analysis Documentation Request
• Submit your request using one of the following options:
  • Complete online request form in Get Started Today tile below
  • Send above-listed documentation to lifopro@lifopro.com or upload here: https://spaces.hightail.com/uplink/LIFO-PRO
• LIFOPro will email you analysis report & fee quote within one week of receiving above documentation or completed request form
• LIFOPro will also contact you to schedule a time to discuss analysis results, fee quote & implementation steps upon delivering benefit analysis report
• LIFOPro will turn around calculation & deliver PDF report package as quickly as needed to meet financial reporting & tax return deadlines

Want to learn more about LIFO & our offerings? Schedule an introductory call or Teams meeting with LIFOPro by calling 402-330-8573, emailing lifopro@lifopro.com or using our online scheduling tool by clicking here: Schedule Call With LIFOPro

LIFO Election Benefit Analysis Documentation Request Listing

Sample LIFO Election Benefit Analysis Report

How LIFO Works & LIFOPro’s Offerings Slide Deck

LIFO Benefit Analysis & Turnkey Solutions Process Flow Charts

• LIFOPro offers complimentary Best LIFO Practices & Methods Reviews for companies on LIFO in the form of a report that includes the following sections:
  • Calculation review
  • Methods compliance review
  • Best LIFO practices review
  • Pro forma calculations to compare LIFO reserve of present vs. alternative submethodologies
  • Calculation policies & procedures review
  • Change recommendations & implementation steps
• Benefits include:
  • Learn about potential strategies for maximizing tax savings from LIFO
  • Detect/prevent past/future calculation errors
  • Identify potential audit exposure risk & how to eliminate/minimize it
  • Get recommendations for LIFO Submethods optimization
  • Get recommendations for simplifying calculation policies & procedures
  • Get straightforward solutions for implementing recommended change

• Best LIFO Practices Review & turnkey outsourcing solutions fee quote documentation
  • LIFO layer history/carryforward schedule from last two periods closed
  • Inflation index calculation documentation from the last period closed (also known as item detail, stock status or inventory valuation report)
  • Product hierarchies (if available)
  • LIFO calculation policies & procedures documentation (if available)
  • Any other schedules/documents not listed above used to complete prior year LIFO calculation
• See our documentation request listing here: Review & fee quote documentation request
• Send documentation to LIFOPro@LIFOPro.com or upload here: https://spaces.hightail.com/uplink/LIFO-PRO
• LIFOPro will email review report, fee quote & sample LIFOPro report package within one week of receiving above documentation (LIFOPro will also contact you to schedule a time to discuss engagement options, documentation requirements, expected/required receivables/deliverables timing)

Want to learn more about the review process & our offerings? Schedule an introductory call or Teams meeting with LIFOPro by calling 402-330-8573, emailing lifopro@lifopro.com or using our online scheduling tool by clicking here: Schedule Call With LIFOPro

• Try the software for 90 days free of any commitment or obligation by completing request form in accordion below
• Accessed via the internet using LIFO-PRO’s private cloud, meaning no installation required
• Full functionality, meaning all features are enabled
• Select from your choice of data:
  • Sample Data – comes preconfigured with the following:
    • Software database file containing sample historical LIFO calculation documentation
    • Sample software input data & templates for running LIFO calculations
    • Also can use your company’s current period input data for running LIFO calculations
  • Company Data – comes preconfigured with the following:
    • LIFO-PRO imports your company’s actual historical LIFO documentation into the software
    • Sample software input data & templates for running LIFO calculations
    • Also can use your company’s current period input data for running LIFO calculations

LIFOPro Software Overview Slide Deck
LIFOPro Software Demo – Internal Indexes
LIFOPro Software Demo – External Indexes (IPIC Method)

Alternative LIFO method (ALM)

Under the ALM, items are defined by model code, and inflation is measured by comparing each model code’s current & prior period’s invoice base costs for all vehicles on hand at year end. To calculate inflation, the model code & base vehicle cost for each vehicle on hand at year end must be extracted from the invoice to create a schedule of quantities & average year end base vehicle costs by model code. A subsequent mapping of each model code’s prior period base vehicle cost is performed, and inflation is calculated by double extending the current year end quantity for each model code against its current/prior invoice base vehicle costs & taking the quotient of the sum of the current & prior period’s extensions.

• Pros
  • Historically consistently created more inflation & LIFO tax benefit than IPIC method until 2020
  • IRS safe harbor method & used by many auto dealers since its inception
• Cons
  • Delays booking annual year end LIFO adjustment & integrating into P12 financial statements compared to IPIC method because the calculation requires for invoices of all vehicles on hand at year end to be available to complete calculation
  • Higher outsourcing costs than IPIC method
  • Interim estimates take more time than IPIC method since inflation is measured by invoice cost
  • Not eligible for heavy duty trucks with GVWR > 14K lbs. (only light duty trucks are eligible; unlike IPIC method which is eligible to be used for all vehicles)
  • Year end calculations require more turnaround time since inflation data typically isn’t available until after year end
  • Used vehicle ALM yields materially less inflation & LIFO tax benefits than new vehicle ALM, causing many dealers to choose to not value their used vehicles on LIFO

External Indexes (aka IPIC method)

Under the IPIC method, items are defined by the Bureau of Labor Statistics Consumer/Producer Price Index categories that includes the goods in a company’s product mix. For auto dealers, there are three BLS PPIs applicable to their inventory (1. Cars 2. Trucks, SUVs, minivans & crossovers 3. Parts) & four BLS CPIs applicable to their inventory (1. New cars 2. New trucks, SUVs, minivans & crossovers 3. Used vehicles 4. Parts). Since most auto dealers have separate general ledger subledger accounts provide a direct mapping to the 3-4 BLS CPI/PPIs, there’s no need to obtain information from each vehicles invoice. Once a schedule of inventory balances by BLS category is prepared, inflation is calculated by calculating a category inflation index for each BLS category, calculating the harmonic dollars weighted quotient by BLS CPI/PPI & taking the quotient of the sum of the inventory balances at specific ID cost & the sum of the harmonic dollars weighted quotients.

• Pros
  • Expedites booking annual year end LIFO adjustment & integrating into P12 financial statements because invoice-level detail is not required (all that is required to complete calculation is summarized balances by type)
  • Annual year end LIFO adjustment can be further expedited by using an inflation measurement period that’s prior to the year end. For example, a company with a December year end could perform their year end calculation on January 1st by using November BLS CPI/PPI.
  • Interim estimates can be easily performed on demand since they can be made using the most recent BLS inflation rates & the prior period’s inventory balance/product mix
  • Can be used for all vehicles, including heavy-duty trucks with GVWR > 14K lbs. (unlike ALM which is only eligible to be used for light-duty trucks)
  • Lower outsourcing costs than ALM
  • IRS safe harbor method & has grown exponentially in popularity over the last three years
• Con: Prior to pandemic, created less inflation & tax deferral than ALM

 Auto Dealer Tax Savings Opportunities & Simplification Strategies

• Switch from the ALM to the IPIC method
  • Can create more inflation & LIFO tax benefits compared to ALM for many makes
  • Materially reduces administrative burden & expedites annual LIFO adjustment process
  • Can also be used for heavy duty vehicles (as opposed to ALM which prohibits heavy duty vehicles from being valued under LIFO)
• Expand LIFO election scope to include parts and/or used vehicles
  • If using PPI, the same inflation rates are applied to new & used vehicles, which is often advantageous since ALM & CPI used vehicle inflation is very volatile & susceptible to material LIFO reserve recapture
  • Single BLS category is used to calculate parts inflation, making IPIC method parts inflation calculation much simpler to calculate compared to calculating an internal index

Sample Auto Dealer LIFO Case Study PDF Report
Figure 1. 2024 Year End Inventory Balances by Type

Figure 2. Pro Forma 2024 Year End LIFO Calculation Comparison Summary

Figure 3. Pro Forma 20 Year Inflation Comparison Summary

Figure 4. LIFO Submethods Recommendations

Pro Forma LIFO Calculation Findings

Present Methods

• 2024 year end (See Figure 2 below):
  • Sample Auto Dealer’s 2024 year end LIFO calculation using the alternative LIFO method for new vehicles only resulted in 1.4% deflation that created $100,870 of LIFO income (CY vs. PY LIFO reserve decrease)
  • The 2024 year end LIFO calculation using the alternative LIFO method for new & used vehicles and internal indexes for parts resulted in 2.4% deflation that created $238,556 of LIFO income
• 20 Year Analysis (See Figure 3 below)
  • The alternative LIFO method created a 20 year average annual inflation rate of 1.5%
  • There was 90% inflation frequency where the alternative LIFO method yielded inflation in 18 of the past 20 years

Proposed Methods

• 2024 year end (See Figure 2 below): Sample Auto Dealers 2024 year end IPIC Method LIFO calculation results were as follows:
  • PPI – new vehicles: 1.8% inflation & $126,091 of LIFO expense
  • PPI – all goods: 1.7% inflation & $169,753 of LIFO expense
  • CPI – new vehicles: -0.4% deflation & $28,103 of LIFO income
  • CPI – all goods: -1.1% deflation & $108,633 of LIFO income
• 20 Year Analysis (See Figure 3 below):
  • Depending on whether CPI/PPI was used and the LIFO election scope, the IPIC method created a 20 year average annual inflation rate of between 1.3% – 1.4%
  • Depending on whether CPI/PPI was used and the LIFO election scope, there was between 55% – 75% inflation frequency where the IPIC method yielded inflation in between 11 to 15 of the past 20 years

 Recommendations

• Switch from ALM to IPIC method & consider expanding election scope to include used vehicles
  • Assuming LIFO election scope remains as is (new vehicles & parts on LIFO), IPIC method using PPI is projected to provide $230K more LIFO expense & $80K more LIFO tax benefit than the alternative LIFO method for the 2024 year end
  • If the LIFO election scope were to be expanded to include used vehicles, IPIC method using PPI is projected to provide $270K more LIFO expense & $90K more LIFO tax benefit than the alternative LIFO method for the 2024 year end
  • Future LIFO tax benefits under IPIC method can be expected to be comparable to the alternative LIFO method since short term historical IPIC inflation has been better than ALM & long term inflation has been comparable
  • IPIC method simplifies LIFO calculation & minimizes administrative burden
• Outsource LIFO calculation
  • LIFOPro manages all aspects of your company’s LIFO calculation, including:
    • Year end LIFO calculation & LIFOPro PDF report electronic delivery providing all amounts required to record LIFO journal entry & prepare P12 financials on a LIFO basis
    • Net inventory method adjustments for dealers netting trade discounts & advertising expenses against vehicle costs
    • BLS category assignments
    • Rebase LIFO layer history as required by IRS Regs. when switching to IPIC method
    • Up to three interim estimates at no additional cost
    • IRS forms preparation for accounting method changes
    • 263A UNICAP costs
  • Maximize LIFO tax benefits from LIFO while minimizing the work
  • Guarantee LIFO calculation accuracy & eliminate IRS audit risk

Application of Recommended Changes

• Use above amounts to report estimated LIFO figure for all goods on P12 financial statements
• Send LIFOPro final 12/31/24 inventory balances by type
• Use 12/31/24 LIFOPro report amounts to report final LIFO figure for all goods on P13 financial statements
• Attach Form 3115/970 & statement package provided by LIFOPro to 2024 year end tax return

Figure 5. Pro Forma 20 Year Inflation Comparison Detail

Figure 6. BLS Auto Dealer CPI/PPI Inflation History

LIFO Compliance & Reporting Considerations

• First-time changes to IPIC method & scope expansions
  • For dealers expanding election scope to include used vehicles and/or parts, P12 financial statements must show estimated LIFO values for both new and used vehicles
  • P12 2024 estimated LIFO value using IPIC method should be incorporated into P12 year end financial statements now if expanding election scope to include used vehicles or parts to ensure LIFO conformity rule compliance
  • Current period inventory balances or estimated year end balances & year to date or 12M ended November CPI/PPI can be used as an easy way to quickly incorporate LIFO estimate into P12 statements
  • 12M ended November PPI can be used to complete final LIFO calculation to facilitate quick close & incorporating final LIFO value into P12 financial statement
  • Change from ALM to IPIC method is automatic approval change & is applied prospectively
  • Change to IPIC method requires for Form 970/3115 to be prepared, which is attached to tax return
• Subsequent changes following making a switch to IPIC method
  • Once the switch to IPIC from ALM is made, taxpayer must wait five years until a change back to the ALM can be made under automatic change procedures
  • For dealers switching from ALM to IPIC, a switch can be made from CPI to PPI or PPI to CPI as soon as the second year using the IPIC method (but must wait five years following changing between CPI/PPI for the first time)
  • Vast majority of dealers who elected/switched to IPIC method in 2021 used CPI because CPI used vehicles inflation was 37% & provided far more inflation/tax benefits than PPI (PPI inflation was 2% – 4% in 2021)
  • In 2024, there is deflation in the Used vehicles CPI, which will create LIFO income (aka LIFO recapture) for auto dealers using the IPIC CPI method who have used vehicles on LIFO. Since there is 1.7% – 1.8% PPI inflation for vehicles in 2024, many dealers using the IPIC CPI method who have used vehicles on LIFO should consider switching from CPI to PPI for the 2024 year end.