Auto Dealer Outsourcing Solutions

LIFO Calculation Outsourcing Engagement Overview

IRS & Financial Reporting Annual LIFO Calculation Requirements

In accordance with IRS regulations §472, taxpayers are required to annually calculate the ending LIFO inventory value. In order to comply with the IRS LIFO conformity rule, taxpayers are also required to present income as determined under the LIFO method on year end financial reports/statements for all periods that income is reported on a LIFO basis on the tax return. In conjunction with complying with the LIFO conformity rule, an adjusting journal entry must be made to account for the change in the current vs. prior period’s LIFO reserve.

A taxpayer’s current LIFO value inventory is a historic accumulation of quantity and price changes from the taxpayer’s initial year of the LIFO election. Therefore, the taxpayer must maintain supplemental and detailed LIFO inventory records that support the current value of the inventory and the clear reflection of income. The LIFO regulations underline the importance of these historic records by specifically requiring that taxpayers maintain them. This includes annually determining the Current-year Cost, calculating a current year inflation index, calculating base year & LIFO increments (decrements), computing the LIFO inventory value and determining the LIFO reserve.

The Service may terminate a taxpayer’s LIFO election if the taxpayer fails to comply with the LIFO conformity rule, or if the taxpayer does not maintain adequate books and records for its LIFO inventory and all computations.

• LIFOPro’s Outsourcing Engagement Responsibilities
  • Preparing all aspects of the LIFO calculation & supporting documentation free of errors and in accordance with IRS Regs., including:
    • Inflation calculation (if applicable, including prior year base vehicle cost reconstruction using the alternative LIFO method & BLS category assignments for the IPIC method)
    • Layer calculations
    • LIFO inventory value, LIFO reserve & LIFO reserve change calculations
    • Prepare documentation (LIFOPro reports) that provide adequate books & records of the LIFO inventory value & all supporting computations (and satisfies IRS LIFO books & records requirement)
  • Deliver LIFOPro report package that includes all amounts required for the client to complete the following:
    • Record this year’s LIFO journal entry which will adjust the year end inventory balance to its LIFO value
    • Prepare the year end annual financial report/statement
    • Prepare year end tax return on a LIFO basis
  • Net inventory method adjustment preparation (if applicable; for auto dealers using net inventory method)
  • Interim LIFO estimate preparation & delivery (if applicable)
  • Preparing the book vs. tax LIFO Schedule M tax return entry value (if applicable)
  • Preparing the §263A UNICAP cost Schedule M tax return entry value (if applicable; using the client-provided absorption ratio)
  • Preparing IRS forms & statements related to LIFO elections or accounting method changes (if applicable)
  • Preparing supporting documentation related to any pro forma LIFO calculations, reviews or accounting method changes (if applicable)
  • Up to 40 hours of audit support related to the services provided by LIFOPro
• Client Responsibilities
  • Prepare & furnish the documents required by LIFOPro to complete the services listed above
  • Review LIFOPro report package and confirm all applicable amounts match the client’s books and records
  • Record the annual LIFO adjusting journal entry using amounts provided in client’s LIFOPro report package
  • Prepare annual financial reports/statements on a LIFO basis using amounts provided in client’s LIFOPro report package
  • Prepare the tax return on a LIFO basis using amounts provided in client’s LIFOPro report package
  • Notify LIFOPro of any LIFOPro report discrepancies discovered by the client (if applicable)
  • Notify LIFOPro of adjustments made after LIFOPro report delivery that would affect the accuracy of the client’s LIFO inventory value (if applicable)
  • Attach IRS forms & statements related to LIFO elections or LIFO accounting method changes to the tax return (if applicable)

Net Inventory Method Services

IRS & Financial Reporting Annual Net Method Calculation Requirements

In accordance with IRS Regs. §471-3(b) Rev. Ruling 84-41, manufacturers rebates (aka trade discounts) and advertising expenses must be treated as a reduction in the cost of the automobile in the year of purchase. Accordingly, these items must be annually reduced from the cost of ending inventory.

LIFOPro’s Outsourcing Service Engagement Responsibilities

• Determining the value of trade discounts and advertising expenses included in the cost of the vehicles on hand at year end
• Computing the year over year change in the value of trade discounts and advertising expenses
• Determining the Current-year Specific Identification Cost net of these adjustments which is required to prepare the LIFO calculation
• Preparing net method calculation & supporting documentation in accordance with IRS Regs.
• Preparation & delivery of LIFOPro report package containing the following:
  • Comprehensive documentation of the net method calculation
  • Illustrative journal entry schedule that can be used to record this year’s net inventory method journal entry (which will adjust the year end inventory balance to be net of trade discount and advertising expense adjustments)

Client Annual Net Inventory Method Responsibilities

• Prepare & furnish the documents required by LIFOPro to complete the services listed above
• Review LIFOPro report package and confirm all applicable amounts match the client’s books and records
• Record the annual net method adjusting journal entries using LIFOPro report package illustrative journal entry schedule provided to client
• Preparing annual financial reports/statements using the net inventory method using LIFOPro report package illustrative journal entry schedule provided to client
• Preparing the tax return using the net inventory method using LIFOPro report package illustrative journal entry schedule provided to client
• Notify LIFOPro of any LIFOPro report discrepancies discovered by the client (if applicable)
• Notify LIFOPro of adjustments made after LIFOPro report delivery that would affect the accuracy of the client’s annual net inventory method adjustments (if applicable)

• Using Alternative LIFO Method
  • Base costs                                                                                                     $300 – $800 per dealer
  • Unit cost per vehicle
    • Using Excel vehicle data input sheet schedule provided by client $2 – $4 per vehicle
    • Using invoice PDF files provided by client                                          $3 – $5 per vehicle
  • Parts LIFO calculation                                                                                        $200 – $500 per dealer
  • Interim estimates (optional; per estimate)
    • Using prior year product mix                                                                  $150 – $300 per dealer
    • Using current year product mix                                                              $250 – $500 per dealer
• Using IPIC Method (using Bureau of Labor Statistics Consumer/Producer Price Indexes or BLS CPI/PPI)
  • BLS CPI/PPI category assignment (optional)                                                $100 – $   500/dealer
  • LIFO calculation & report preparation                                                            $300 – $1,500/dealer
• IRS Forms preparation
  • IRS Form 970 Application to Use LIFO Inventory Method & statement $   400 – $   800/dealer
  • IRS Form 3115 Accounting Method Change & statement                            $1,000 – $2,000/dealer
• Services Delivery and Timing: Earlier of the following two dates:
  • Client’s requested LIFOPro report delivery deadline
  • Within 1 week of receipt of the documentation requested by LIFOPro
• Terms
  • Engagement Period: 1 year with optional annual renewal
  • Recurring annual calculation service fee lock period: 3 years

The first year and recurring annual calculation service costs will be the same amount.

 Fee Ranges

• A range of fees are provided for alternative LIFO method base costs, interim estimates & IPIC method calculations as they are dependent on the total inventory balance of the dealership and the total number of dealerships included in the engagement
• The fee ranges will be on the lower end of the fee ranges for multi-dealership engagements
• Additional fee reductions will be applied to multi-dealer engagements where the ownership group of multiple dealers are agreeable to receiving a single LIFO report package that presents each dealer’s LIFO calculation results as its own standalone pool (report package will also show all pools combined totals)
• To be provided a fee quote showing fixed fee amounts, the client will need to provide a count of the total number of dealerships to be included in the engagement as well as the inventory balances for each dealer to be included in the engagement

Alternative LIFO Method Disclaimer

Clients furnishing an Excel vehicle data input sheet schedule to LIFOPro will incur a $2 – $4 per vehicle unit cost. Clients who elect to not prepare an Excel vehicle data input sheet schedule, but instead furnish invoice PDF files to LIFOPro will incur a $3 – $5 per vehicle unit cost. A $300 – $800 base fee will apply for each dealer included in the engagement. The base costs and unit costs are for year end calculation services only and excludes interim estimates for alternative LIFO method engagements. Additional costs apply to obtain an interim estimate using the alternative LIFO method.

 IPIC Method Disclaimer

Clients furnishing an Excel summary schedule of inventory balances by vehicle type (new/used or car/truck) will incur a $300 – $1,500 annual fee for each dealer included in the engagement. Clients who elect to not prepare an Excel summary schedule of inventory balances by vehicle type will incur an additional $100 – $500 annual fee for each dealer included in the engagement. The annual calculation service fee for IPIC method engagements includes up to three interim estimates using the client’s prior period’s product mix and year to date BLS CPI/PPI inflation. The annual fee amount will not be reduced if the client does not obtain interim estimates as the time requirements for performing IPIC method interim estimates are negligible.