Get a Free Analysis Today & Determine Your Tax Savings from Switching to IPIC CPI or From Electing LIFO!
Dealers already on LIFO: Avoid creating taxable income under your present LIFO method before it’s too late & get a free analysis to see the potential savings created by switching to IPIC CPI! Complete LIFOPro’s Auto Dealer IPIC Analysis Questionnaire to get your free analysis today: Auto Dealer IPIC LIFO Benefit Analysis Questionnaire
Financial reporting: must show IPIC CPI and/or expanded scope including used vehicles LIFO inventory balance on year-end financial statement (or provide an estimate; can be obtained from LIFOPro’s free analysis report)
Tax:
S Corporations & Partnerships
Calendar year ends: March/September 15th, 2024 depending on if an extended return will be filed or not
Non-calendar year ends: 3/9 months from fiscal year end return date depending on if an extended return will be filed or not
C Corporations: April 18th or October 15th, 2024 depending on if an extended return will be filed or not
Calendar year ends: April 18th or October 15th, 2024 depending on if an extended return will be filed or not
Non-calendar year ends: 4/9 months from fiscal year end return date depending on if an extended return will be filed or not
Dealers electing LIFO
Financial reporting: must show inventory balance valued using LIFO on year-end financial statement (or provide an estimate; can be obtained from LIFOPro’s free analysis report)
Tax:
S Corporations & Partnerships
Calendar year ends: March/September 15th, 2024 depending on if an extended return will be filed or not
Non-calendar year ends: 3/9 months from fiscal year end return date depending on if an extended return will be filed or not
C Corporations
Calendar year ends: April 18th or October 15th, 2024 depending on if an extended return will be filed or not
Non-calendar year ends: 4/9 months from fiscal year end return date depending on if an extended return will be filed or not
Auto dealer industry is likely the most predominant industry to use LIFO in terms of the percentage of total dealerships that use LIFO
Is the only industry that has the option to use an inflation measurement source specially designed for its industry, which is commonly referred to as the alternative LIFO method (ALM)
Majority of auto dealers on LIFO have use the alternative LIFO method as its inflation measurement source because it has historically provided much higher after-tax cash savings than other method alternatives such as the IPIC method (using external inflation indexes published by the Bureau of Labor Statistic’s Consumer/Producer Price Index divisions aka BLS CPI/PPI)
Many dealerships have what is referred to as a limited or selective LIFO election, which infers that less than 100% of goods are valued under LIFO
Reasons for having limited LIFO election are as follows:
Minimal or unfavorable tax impact of having used vehicles & parts on LIFO under alternative LIFO method
LIFO Taxpayers are required to value inventories on LIFO at cost & are therefore not allowed to maintain a lower of cost or market reserve (LCM) on used vehicles if valued under LIFO
Many dealerships also maintain lower of cost or market reserves for used vehicles, which provides a form of tax savings since it reduces ending inventory balances, increases costs of goods sold & reduces taxable income
Some auto dealers leave used vehicles & parts off LIFO for the following reasons:
For used vehicles, they perceive the tax savings of maintaining LCM reserve on these goods to be greater than the tax savings of having these goods on LIFO
For parts, the alternative LIFO method inflation has been too minimal to warrant including those goods in the LIFO calculation
Switching inflation measurement sources from the alternative LIFO method to the IPIC method & CPI since CPI new vehicle inflation is 2x – 4x higher than alternative LIFO method inflation (ALM) in 2022 year end
Consider expanding LIFO election scope to include used vehicles and/or parts to maximize tax savings
See Auto Dealers on LIFO Case Studies below
Dealers Not on LIFO
Elect LIFO for the 2022 year end using the IPIC method & CPI as the inflation measurement source
Consider including used vehicles and/or parts in the LIFO election scope to maximize after-tax cash savings
See New LIFO Election Case Study below
All Dealers
7% CPI used car inflation for 12M ended June ’22 & 3% year to date for 6M ended June ’22 CPI will create massive tax savings from LIFO by expanding or including used vehicles in election scope
For most auto dealers, preexisting used vehicle LCM reserve has been largely reduced as of 2021 year end due to inventory liquidations & appreciation in used vehicles
For most auto dealers, used vehicle LIFO tax savings will be greater than LCM reserve over long run since LCM reserve has to be paid back every time the vehicles with reserves are sold (unlike LIFO reserve that stays intact
Historical average annual inflation through 2019 had been much higher than IPIC CPI/PPI inflation, which in turn provided much more favorable tax savings from LIFO
Most predominantly used LIFO inflation measurement source in the auto dealer industry
Cons
Much lower 2020 & 2021 inflation than IPIC CPI method, meaning benefits from LIFO during these periods will be lower
Much costlier than IPIC method to complete inflation calculation because it requires for detailed breakdowns of current & prior period’s invoices to be maintained for all vehicles
Much higher administrative effort & data requirements than the IPIC method
Most auto dealers either use software or outsource their LIFO calculation because of the complexity of the calculation
IPIC Method using CPI
Pros
Much higher 2020 – 2022 inflation than ALM, which has & will result much higher tax savings from LIFO than ALM over last three years
Much lower costs compared to ALM because it only requires for inventories to be broken down by the following applicable categories:
New cars
New trucks, SUVs & vans
Used vehicles (if included in LIFO election scope)
Parts (if included in LIFO election scope)
Considered a safe harbor method by the IRS
Low administrative effort & data requirements than ALM
Has historically had much lower inflation than ALM
Future inflation outlook is unknown, so auto dealers already on LIFO who switch to the IPIC method would be “stuck” with a less favorable method over the next four years after changing from the ALM in 2021 in the event that ALM inflation becomes better between 2022 – 2025
Other Considerations
All Dealers
For tax purposes, lower of cost or market (LCM) reserve must be taken into income over a 3-year period beginning in the year of change if used vehicles are to be included in LIFO election scope
LCM reserve can continue for financial reporting, but Schedule M adjustment would need to be recorded beginning in year of change since LIFO taxpayers must determine current year cost of ending inventories valued using LIFO at cost
Dealers already on LIFO:
IRS Form 3115 must be filed by return extended filing deadline to switch to IPIC method, but the switch is an automatic approval change
Change is made prospectively on a cutoff basis, meaning prior year end LIFO reserve remains intact
Must wait five years to switch back to alternative LIFO method. For example, a company switching to IPIC CPI for the 12/31/2021 year end must wait until the 12/31/2025 year end to switch back to the alternative LIFO method.
2021 year end financial reports must reflect proposed method LIFO inventory balance (or an estimate of this amount; not present method LIFO inventory balance)
Dealers electing LIFO:
2022 year end financial reports must reflect inventory balances valued at LIFO
Can switch to alternative LIFO method in the next tax year end that occurs after the LIFO election. For example, a company electing to use IPIC CPI for the 06/30/2022 year end could switch to the alternative LIFO method for the 06/30/2023 year end.
Must wait five years to terminate LIFO election under automatic change procedures; advanced approval Form 3115 must be filed prior to year end & $12K IRS User’s fee must be paid if election is terminated prior to fifth year on LIFO.
Get educated on the Inventory Price Index Computation (IPIC) method, including the origins, advantages & disadvantages, calculation procedures, options & much more!
Learn about LIFO opportunities abound for CPA firms, how to increase the scope of your LIFO offerings & learn how to easily identify good LIFO candidates!
Learn how the IPIC LIFO Method works, find valuable Bureau of Labor Statistics (BLS) links and stay up to date on all changes related to the IPIC Method!
Learn about LIFOPro’s past roles in partnering with companies & CPA firms to deliver great value by finding solutions to the most challenging LIFO issues!
The Inventory Price Index Computation (IPIC) method allows taxpayers to use published external indexes to calculate inflation for the purpose of valuing LIFO inventories.
Supermarkets face LIFO calculation issues unique to the industry. Find out why & answers to how they are dealt with Special Challenges for Supermarkets page.
Why the Double-extension LIFO Index Calculation Method is Unreliable
Facts describing why the double-extension LIFO index calculation method is unreliable and examples proving how this method creates unpredictable results.
Find recent important changes & BLS addition of Table 9 Wherever-provided Services & Construction PPI Indexes & Important Change in PPI Code Structure page.
Find information on CPI Category Changes & Bureau of Labor Statistics Consumer Price Index update information such as new medical commodity codes here!
Learn IRS Regulations Requirements for missing PPI Indexes, procedures for reassigning discontinued PPI Categories at LIFO-PRO’s PPI Category Changes page.
Producer Price Index Usage by Supermarkets to Increase Tax Deferral
Learn how drugs, non-foods & food/beverage indexes cause increase LIFO tax benefits at our PPI Index Usage by Supermarkets to Increase Tax Deferral page.
Switching from the double-extension to link-chain method? Want to achieve higher possible inflation indexes? Learn more at the IPIC LIFO Advantages page.
Request a software trial, LIFO Election Benefit Analysis, Best LIFO Practices Methods Review or cost estimate. All of our requests are complimentary & free of obligation!
Accounting and financial professionals who work with LIFO need to understand the jargon associated with LIFO. Below are a number of LIFO-related terms.
Get answers to who should use the LIFO method, how much LIFO may benefit your company or client & good LIFO candidates by industry & principal business activity along with historical inflation data.
