Turnkey Outsourcing Solutions

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 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 on a LIFO basis
    • 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
  • Prepare §263A UNICAP Schedule M tax return entry using amounts provided in client’s LIFOPro report package (if applicable)
  • Prepare book vs. tax LIFO Schedule M tax return entry using amounts provided in client’s LIFOPro report package (if applicable)
  • Notify LIFOPro of any LIFOPro report discrepancies discovered by the client
  • 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)

• Optional complimentary offering 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

• All clients receive LIFOPro PDF report package containing comprehensive documentation of the LIFO calculation, including all amounts required to record LIFO-related journal entries & present LIFO-related figures on financial reports & tax return
• Report package generated from LIFOPro software & includes the following applicable reports (also available in Excel format):
  • LIFO calculation reports
    • Current year LIFO calculation summary (Report 18)
    • Current year LIFO reserve calculation proof (Report 18a)
    • LIFO inventory history summary (Report 16)
    • LIFO layer history proof (Report 16a)
    • LIFO inventory history detail (Report 17)
  • Inflation calculation reports
    • Internal Indexes
      • Current year index calculation summary (Report 27)
      • Current year index calculation detail (Reports 27a & 27b)
      • Missing item cost exceptions detail (Report 28a)
      • Price change outliers detail (Report 28b)
      • Data input statistics (Report 29)
      • Inflation by product hierarchy (Report 30)
    • External Indexes (IPIC CPI/PPI)
      • Current year index calculation summary (Report 23S)
      • Current year index calculation detail (Report 23)
      • Category inflation index calculation detail (Report 24)
      • Discontinued/replaced BLS categories (Report 25)
      • IPIC pooling method 5% test proof (Report 26)
  • Supplemental reports
    • Projections (Report 1)
    • Consolidated reports multiple entities
    • Reports including Sec. 263A UNICAP costs
    • IPIC CPI/PPI comparator report
    • Schedule M adjustment & LIFO expense breakdown reports

• Pricing is based on company size & engagement scope
• Terms are for a one-year period & are free of multi-year commitments
• Recurring annual fee is guaranteed to remain the same for at least 3 years
• LIFOPro reports delivered electronically including comprehensive documentation of all LIFO amounts required to record adjusting general ledger & tax return entries (all reports can be delivered as either Excel/PDF files)
• Also includes:
  • Up to three interim LIFO estimates for companies using external indexes (using most recently published BLS inflation indexes & prior year end product mix & inventory balances)
  • Unlimited report revisions
  • Up to 40 hours of GAAP & IRS audit support
  • Copy of LIFOPro’s annual SOC 1 Type II report
  • Customized supplemental services requested by client

Want to learn more about our turnkey outsourcing solutions? 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

Turnkey Outsourcing Solutions Slide Deck

Turnkey Outsourcing Solutions Process Flow Chart

Turnkey Solutions Fee Quote Documentation Request Listing