How to Identify Clients that are Good LIFO Election Candidates

• Step 2.1: Identify Good 2022 LIFO Election Candidates
  • In LIFOPro’s Election Candidate Target List Excel sheet, locate each client’s Column B Industry Type description & determine if it resembles or matches any of the BLS commodity/category descriptions shown in Column B of the LIFO Election Candidates by BLS Excel sheet. See Figure 2.1 below.
  • For clients whose industry type description resembles or matches one or more BLS descriptions: Take the following steps to fill in the BLS code field located in Column E of the Election Candidate Target List Excel sheet (See Figure 2.1 below):
    • If a single BLS commodity/category represents a material portion of your client’s product mix or represents the largest proportion of your client’s product mix in comparison with all other BLS codes: Enter the matching BLS code from Column A of the LIFO Election Candidates by BLS Excel sheet to your client’s corresponding Column E BLS code row in the Election Candidate Target List Excel sheet
    • If multiple BLS commodities/categories represent material portions of your client’s product mix:
      • If there are multiple BLS Codes that represent equally large or material portions of your client’s product mix, obtain a count of the total number of BLS commodities/categories that represent material portions of your client’s product mix and include your client in the Election Candidate Target List Excel sheet equal as many times as the total BLS commodities/categories that represent material portions of your client’s product mix. For example, if 3 BLS commodities represent material portions of your client’s product mix, then list your client in the Election Candidate Target List Excel sheet three times.
      • Enter each matching BLS code from Column A of the LIFO Election Candidates by BLS Excel sheet to your client’s corresponding Column E BLS code rows in the Election Candidate Target List Excel sheet
    • If none of the BLS codes listed in the Top LIFO Election Candidate by PPI sheet match your client’s primary trade or business description, but you still want to explore LIFO for the client OR believe they’re a good LIFO candidate: See the steps listed in the How to Use This List when no BLS codes match your client’s industry in the About This List section located at the bottom of these instructions.

Figure 2.1 Election Candidates by BLS Code List & Election Candidate Target Client List

• Step 2.2: Review, Refine & Prioritize LIFO Election Candidate Target List (Optional)
  • Review/refine: Filter the 2022 Good LIFO Election Candidate field (Column G) to only include “Yes” values as this will only show the clients with a matching BLS code and exclude ones without codes as ones without codes are either not good LIFO election candidates or need to be further investigated by contacting LIFOPro. See Figure 2.2 below.
  • Prioritize LIFO Election Candidate Target List: If you have multiple clients who are Good LIFO Election Candidates, LIFOPro recommends prioritizing the list to ensure the best opportunities are explored and/or pursued by your firm & clients first. Suggestions are as follows (See Figure 2.2  below):
    • Election year LIFO expense or tax savings (Columns H:I): Sort from highest to lowest. This will sort the sheet to show the clients with the highest dollar-value election year LIFO tax benefits
    • Year to date vs 20Y Average Inflation Multiplier (Column O): Sort from highest to lowest. This will sort the sheet to show the clients whose election year inflation/LIFO expense that is highest in proportion to the historical average annual inflation rate. This is a useful means of prioritizing your clients who are good election candidates because the higher the multiplier, the larger the magnitude of the current inflation in relation to historical norms. For example, an inflation multiplier of 4 suggests that the election year inflation & LIFO expense represents 4 years’ worth of LIFO tax benefits when compared to a normal period of inflation.
    • Inflation Frequency or Inflation Frequency Rate (Columns M:N): Sort from highest to lowest. This will sort the sheet to show the clients with the most consistently or frequently occurring inflation. For example, the 07 Rubber & plastic products PPI has an 85% inflation frequency over the last 20 years. Candidates with the highest inflation frequency are afforded the luxury of obtaining LIFO tax benefits in more periods than those with lower frequencies, and are thereby have a decreased likelihood of future LIFO reserve recapture occurring in the future.
    • 20 Year Average Annual Inflation Rate (Column L): Sort from highest to lowest. These candidates are likely to yield the largest long-term LIFO tax benefits based on the historical inflation trends. For example, a candidate with a 20 year average annual inflation rate of 4% will have double the potential inflation & long-term LIFO tax benefits of a candidate with a 2% 20 year average annual inflation rate. Although this rate does not imply that it will also provide the best election year LIFO tax benefits, it suggests that it is likely to have the highest long-term benefits.

Figure 2.2 Review, Refine & Prioritize LIFO Election Candidate Target List (Optional)

About The Good LIFO Election Candidate Client ID Tool & How to Read the Results

• About the tool: The resources within this file are to be used as a screening tool to quickly identify & prioritize clients and prospects that should explore electing LIFO. The LIFO Election Candidates by BLS sheet is a list of LIFOPro’s top LIFO election candidates by Bureau of Labor Statistics Producer Price Index commodity & Consumer Price Index category (BLS CPI/PPI). Since many companies use these indexes to measure inflation for LIFO calculations (commonly referred to as the IPIC method), it’s a very valuable tool & fairly accurate means for identifying good LIFO election candidates. Since all industries (retailers, wholesalers/distributors & manufacturers) can use PPI, the majority of the list contains BLS PPI commodities. CPI categories have been included because auto dealers are more apt to use CPI than PPI if they were to elect LIFO in 2022 because the CPI inflation & resulting LIFO tax savings is much higher than PPI, and grocery stores or smaller supermarkets are more likely to only use CPI because of the data limitations posed by the retail inventory method & external inventory service physical count procedures. While some BLS PPIs may represent a single industry or even subsume multiple industries, others may represent one of many products within a given industry. Accordingly, when identifying good LIFO candidates using LIFOPro’s Top LIFO Election Candidates by BLS Excel sheet, consider whether a matching PPI or CPI represents a material portion of your client’s product mix, and also consider whether multiple BLS PPIs represent material portions of your client’s product mix.
• How to read the results: The Election Candidate Target List Excel sheet is to act as a “pre-screening” tool that can help CPA firms determine whether exploring LIFO for a client is worthwhile or not. It’s also designed to provide a ballpark estimate of the potential election year tax benefits from LIFO. This is important for many clients because they may not want to even consider exploring LIFO without having a general idea of the potential tax benefits at hand. The inputs used to calculate the results within the Election Candidate Target List Excel sheet are derived from the data entered by the user in Columns C:E and the inflation data shown in the LIFO Election Candidates by BLS Excel Sheet Varying outputs are calculated using formulas between Columns F:O. The results can be read as follows:
  • 2022 Good LIFO Election Candidate (Column G):
    • TBD: Default value. Will be shown if no BLS code is entered in Column G. For any client whose industry type that can’t be matched to a BLS PPI/PPI, this either means that the client is not a good 2022 LIFO election candidate or that you should contact LIFOPro to determine whether the client’s a good candidate or not.
    • Yes: Value returned for clients who ARE good 2022 LIFO election candidates because the BLS code entered in Column E matches a BLS code listed in LIFOPro’s LIFO Election Candidates by BLS sheet. Clients returning a Yes value in Column E should be contacted to inform them about the LIFO opportunity. This could also include a recommendation to obtain a free analysis and/or to learn more about the opportunity, and if desired, it’s safe to share the potential tax benefits of electing in 2022 shown in Column H:I of this sheet.
    • Check BLS Code: Value returned when a value has been entered into Column E that does not match any of the BLS codes listed in the LIFO Election Candidates by BLS Excel sheet. Return to that sheet, locate the correct BLS code that matches your client’s industry type & reenter into Column E.
  • Estimated election year LIFO expense (Column H): This field is calculated by taking the product of your client’s prior year end inventory balance (Column C) and the year to date 2022 (YTD) current year inflation rate (Column J). This amount represents the estimated election year taxable income reduction from LIFO. Although it’s a rough estimate, it should be considered a reasonable means for estimating the potential benefits of electing LIFO. NOTE: For clients who have a September year end, manually adjust the Column H formulas by setting the formula to be the product of Column K & Column C (Column K = 12M ended Sep. inflation)
  • Estimated Election Year Tax Savings (Column I): This field is calculated by taking the product of your client’s Estimated election year LIFO expense (Column G) and their tax rate (Column D). It represents the election year tax liability reduction from LIFO, which is commonly referred to as the after-tax cash savings from LIFO.
  • Year-to-date or 12M Ended September Inflation Rates (Columns J:K): These represent the inflation rates calculated by taking the quotient of the current & prior period’s BLS PPI/CPI. The Column J current year or year to date inflation rate is the most important figure for a potential 2022 year end LIFO calculation because it’s most representative of the potential election year LIFO expense. The year to date current year inflation rate shown in Column J is used to calculate the estimated election year LIFO expense.
  • 20 Year Average Annual Inflation Rates (Column L): This represents the historical average for the 20 year period ended December 2021. It’s used for purposes of comparing the current year Column J inflation rate to this Column’s 20 year annual average inflation rate, and can also be used to develop an educated guess at the potential long-term tax savings potential from LIFO.
  • Inflation Frequency (Columns M:N): These values have an indirect/inverse relationship with the probability of future LIFO recapture. The higher the inflation frequency rate, the lower the chance of LIFO recapture occurring in the future & vice versa. For example, an inflation frequency of 90% would suggest there’s a much lower probability of future LIFO recapture when compared to an inflation frequency of 55%. Inflation frequency is very useful for measuring what many clients will consider to be a risk or cost of being on LIFO, and for clients who are highly risk averse, it’s imperative to measure & include inflation frequency when exploring LIFO.
  • Year to date vs. 20Y Average Inflation Multiplier (Column O): These values have a direct relationship with how the election year inflation/LIFO tax benefit compares to historical averages. They’re the quotient of the Column I current year or year to date inflation rate & the Column L 20 year average annual average inflation rate.
• How to read results when multiple BLS commodities/categories represent material portions of your client’s product mix: When this occurs, you can develop a range or weighted-average estimated election year LIFO expense amount. For example, if your client is an HVAC equipment/supplies wholesaler, multiple PPI codes are applicable to your client because there are two distinctly different PPIs that both represent predominant portions of a HVAC equipment/supplies wholesaler’s product mix. One is the 106 – Heating equipment PPI & the other is the 1148 – Air conditioning equipment PPI. Since this is the case, you’ll develop a more accurate estimate of your client’s election year LIFO expense/reserve and tax savings if you list your client as many times as needed in the Top LIFO Election Candidate by Client sheet in order to develop a range or average of the election year LIFO benefits. In the example of an HVAC wholesaler, you’d list your client twice in the Top LIFO Election Candidate by Client list & enter the 106 & 1148 PPIs on separate rows. In this example, if we were to assume a prior year inventory balance of $10M, you’d develop a range of inflation for those two PPIs of between 7.1% & 19% and an election year LIFO expense of between $700K & $1.9M. From this example, you can see that a wide range of projected LIFO tax savings can occur when your client’s in an industry that has a wide range of goods & where there are multiple PPIs that represent material portions of your client’s product mix. As a result, this tool is for estimate purposes only & LIFOPro recommends obtaining a free LIFO Election Benefit Analysis in order to get a much more accurate estimate that’s likely to be very close to the final year end calculation results.
• How to use this tool when no BLS codes match to your client’s industry: Take one of the following steps:
  • Locate the “next less-detailed PPI included in the Top LIFO Election Candidate by PPI Excel sheet”: The BLS PPI code system ranges from 2-10 digit PPIs, with 2 digit codes representing the least detailed PPIs & BLS PPI major commodity groups, and 8-10 digit codes representing the most-detailed BLS PPI commodities. As a result of this design, all more-detailed or 3 plus digit PPIs are subsumed by a more broad or less-detailed PPI. For example, the 111 Agricultural machinery & equipment PPI is subsumed or include the 11 Machinery & equipment PPI. Take the following steps to locate a next less-detailed PPI that both matches your client’s primary trade/business & a PPI code in the LIFO Election Candidates by BLS Code Excel sheet:
    • • Navigate to the BLS PPI Code List Excel sheet contained in this file & perform a filter on the Category Name Column B field for rows that contains a term or key word that matches your client’s industry type or product mix
      • If the search returns a match or matches, locate the PPI that most closely resembles or matches your client’s primary business, go back to the Top LIFO Election Candidate by PPI Excel sheet & locate the next less most-detailed PPI that matches the PPI code that you located in the BLS PPI Code List. See the following examples:
        • You have a client who is a ball bearing manufacturer, but you can’t locate a matching PPI in the Top LIFO Election Candidate by PPI sheet. In the BLS PPI Code sheet, you’ll find the PPI code most closely related to your client’s primary trade or business is 114905 – Ball and roller bearings. Once you’ve found the PPI, locate the next less most-detailed PPI included in the LIFO Election Candidates by BLS list. Within the list, you’ll find that the 114 General purpose machinery & equipment PPI is listed, so you should enter the 114 PPI into the Top LIFO Election Candidate by Client Excel sheet.
        • You have a client who is a tool wholesaler, but you can’t locate a matching PPI in the Top LIFO Election Candidate by PPI sheet. In the BLS PPI Code List, you’ll find the PPI codes most closely related to your client’s primary trade or business are 1042 – Hand and edge tools and 1132 – Power-driven hand tools. Once you’ve found those PPIs, locate the next less most-detailed PPI included the LIFO Election Candidate by BLS list. Within the list, you’ll find that the 104 – Hardware & 113 – Metalworking machinery & equipment PPIs are listed. In this example, you should create a second row for your client & enter the 104 & 113 PPIs in those two rows in order to develop a range or average Election year LIFO expense/reserve so you should enter the 114 PPI into the Top LIFO Election Candidate by Client Excel sheet.
    • Contact LIFOPro to obtain a high-level LIFO estimate or free LIFO benefit analysis: In many cases, CPA firms will contact LIFOPro regarding a client who they’d like to approach about LIFO for the first time, but would like to get a general idea of whether it’ll be worth the CPA firm or client’s effort to discuss or consider exploring LIFO. In these cases, LIFOPro will leverage our knowledgebase to provide you with a clear answer regarding whether the client could be a good LIFO candidate or not, and also provide firms with a high-level LIFO tax savings estimate assuming we’re provided with an adequate amount of background on the client (such as the client’s industry, website URL etc.) so we can review the most applicable/predominant BLS PPIs included within their product mix). In other cases, CPA firms understand that obtaining a complete LIFO benefit analysis is very straightforward & requires a minimal amount of effort, so we recommend doing so because there are only a select few industries that are truly bad LIFO candidates & many more industries which are generally good LIFO candidates.

LIFOPro’s Good LIFO Election Candidate Client ID Tool
Good LIFO Election Candidate ID Steps
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