IPIC LIFO Advantages

IPIC LIFO Advantages

Advantages of using the IPIC LIFO Method include:
Higher inflation indexes possible – Some companies have found CPI or PPI inflation rates to be consistently higher than their internal index inflation. For most large supermarket chains the advantage of using CPI vs. internal indexes has been substantial. An annual positive differential of 1% between CPI or PPI inflation and a company’s internal index inflation would reduce taxable income by $1 million annually for a company with $100 million in total inventory at FIFO cost at the beginning of a year.

Fewer pools possible – Supermarket chains not using IPIC LIFO are required to maintain as many as 12 pools. Supermarket chains using IPIC LIFO use between 3 and 6 pools because IPIC LIFO allows pooling based on the 8 different CPI Major Groups or 15 different 2-digit PPI codes and this is the number of pools typically required using this method. Having fewer pools will produce additional LIFO benefits because layer erosions are fewer since decreases in formerly separate pools will be offset by increases in others when pools are combined.

Index calculation simpler than internal index – Use of a published index precludes the need to calculate an internal index unless companies switch for tax LIFO only. Internal index calculations are usually a major undertaking and can be avoided if companies switch for book LIFO also. The IPIC LIFO weighted average index calculations can also be complicated if made manually but this problem is solved with automated LIFO software.

Treatment of “new items” in inventory – New items are inventory items that were purchased for the first time during the year and are on hand for the current year end. New items present a problem for internal index calculation because the inventory accounting system has no record of a prior year end unit price for the new item. The two methods for dealing with new items allowed by the IRS in calculating LIFO internal indexes are either potentially very time consuming or tend to understate the actual inflation. These problems go away completely using the IPIC method.

Simple way for manufacturers to use LIFO for labor and overhead inventories – It is fairly common for manufacturers to exclude labor and overhead inventories from the LIFO election scope because the IRS does not allow separate LIFO pools for these costs (this is called the components-of-cost method). This means that for labor and overhead inventories to be included in the LIFO election scope for LIFO internal index calculations, those costs must be added to the unit cost of each item. Unless a manufacturer uses standard cost accounting, inclusion of these labor and overhead costs for each item is not practical. This problem goes away using the IPIC method because W-I-P and finished goods inventory items, (raw materials, labor and overhead) are assigned to the appropriate PPI commodity code applicable to the ultimate finished good.

IRS audit exposure reduced for past years – Companies switching to the IPIC method are provided a “Safe Harbor” by the IRS with respect to methods used in years prior to the change. IRS audit exposure may be eliminated in these areas:

  • Pooling – Many companies use pooling methods not authorized by the IRS. Taxpayers may elect the optional IPIC pooling rules thereby establishing an acceptable pooling method.
  • Statistical sampling – Many companies use internal index sampling methods not acceptable to the IRS. For example, a company’s sampling method may exclude new items.
  • Other – Some manufacturers still use the components of cost method despite its prohibition by the IRS. Some manufacturers also incorrectly apply raw materials only indexes to total inventory dollars including labor and overhead dollars. Companies can eliminate exposure from use of these methods by adopting IPIC.

Easy means of switching from the double-extension method – The IRS has been reluctant to permit changes from this submethod to the link-chain method, especially for companies whose annual turnover of inventory items is not rapid. Taxpayers can make this change without IRS consent when electing the IPIC method and electing the link-chain submethod as an automatic approval change.

IPIC LIFO need not be also used for financial reporting – Companies may adopt IPIC for tax purposes while continuing to use internal indexes for book LIFO. Higher tax LIFO expense may result without increasing the amount of the book LIFO expense if the internal indexes used for financial reporting are less than the IPIC tax indexes.

PPI Historical Inflation Averages

Historical annual inflation rate averages through May ’24 for all 2 and 3-digit PPI commodity groupings are listed below (capitalized category description denotes a Major BLS PPI Commodity Group i.e. IPIC pool):

 PPI CodeBLS PPI Category Description1M 5/24YTD 5/241YR 5/243YR 5/245Y 5/2410YR 5/2420Y 5/24
01FARM PRODUCTS-0.1%4.6%-9.0%2.3%7.0%0.7%2.5%
011Fruits & melons, fresh/dry vegs. & nuts0.3%0.0%-14.0%8.3%3.4%2.8%3.5%
012Grains8.7%-0.8%-29.7%-12.8%5.8%-0.8%2.6%
013Slaughter livestock0.3%23.9%38.6%14.0%10.5%2.7%3.9%
014Slaughter poultry0.1%3.9%0.4%7.6%6.2%1.3%3.2%
015Raw cotton-15.6%-15.0%-23.2%-7.2%1.7%-2.2%0.3%
016Raw milk-6.6%-9.1%-14.6%4.9%3.7%-2.0%-0.1%
017Chicken eggs-33.6%-8.1%-59.5%23.2%27.5%1.6%4.2%
018Hay, hayseeds and oilseeds5.8%-3.4%-17.8%-7.6%7.4%-1.5%1.3%
02PROCESSED FOODS AND FEEDS0.3%2.6%0.8%4.5%4.8%2.0%2.7%
021Cereal and bakery products0.3%-0.1%0.4%7.4%5.2%2.8%3.2%
022Meats, poultry, and fish0.5%8.6%7.4%1.7%5.2%1.7%2.6%
023Dairy products1.8%2.1%-3.3%3.9%3.1%0.3%1.5%
024Processed fruits and vegetables0.5%0.0%8.6%10.3%6.8%4.2%4.0%
025Sugar and confectionery-0.9%6.3%12.4%8.5%5.2%3.0%3.3%
026Beverages and beverage materials-0.3%2.4%2.8%6.2%4.3%2.8%2.6%
027Fats and oils-0.3%-6.1%-23.4%-1.3%6.3%1.9%2.6%
028Miscellaneous processed foods-0.2%1.6%-0.6%7.7%5.2%2.8%2.9%
029Prepared animal feeds0.0%-4.3%-11.0%0.9%4.2%0.0%2.5%
03TEXTILE PRODUCTS AND APPAREL0.3%1.7%0.7%5.7%4.4%2.5%2.2%
031Synthetic fibers3.2%7.1%2.8%6.7%5.3%3.1%2.4%
032Processed yarns and threads-0.5%0.6%-2.6%4.2%4.4%2.1%2.5%
033Greige fabrics-0.4%-0.4%-0.9%5.9%3.8%1.8%2.1%
034Finished fabrics-0.8%0.0%-0.7%5.4%4.7%2.8%2.6%
038Apparel & other fabricated textile prods0.3%1.6%3.4%5.0%3.4%2.2%1.9%
039Miscellaneous textile products/services-0.3%-0.7%-4.2%11.0%7.0%3.1%2.5%
04HIDES, SKINS, LEATHER, AND RELATED PRODUCTS-0.2%-0.3%0.0%-2.4%1.2%-2.7%0.4%
041Hides and skins, incl. cattle-1.5%-7.9%-15.0%-21.0%-6.3%-12.0%-3.2%
042Leather-0.1%0.9%1.4%-0.4%1.9%-4.0%-0.4%
043Footwear0.0%1.6%3.0%6.2%4.0%3.0%2.8%
044Other leather and related products0.0%0.9%4.4%4.2%2.8%2.4%2.1%
05FUELS AND RELATED PRODUCTS AND POWER-4.8%3.2%-10.6%5.2%5.1%0.2%3.0%
051Coal10.3%6.5%3.2%15.8%8.5%3.8%5.1%
053Gas fuels-2.0%-25.4%-57.9%-11.5%-0.4%-8.8%-4.2%
055Utility natural gas-1.4%-8.0%-24.8%3.8%6.3%1.6%1.6%
056Crude petroleum (domestic production)-9.8%14.7%3.5%6.2%4.5%-2.9%3.6%
057Petroleum products, refined-9.0%8.8%-10.4%4.8%5.5%-0.7%4.1%
058Asphalt and other petroleum and coal products, n.e.c.11.4%-3.4%-24.2%-0.1%0.7%-0.5%7.2%
06CHEMICALS AND ALLIED PRODUCTS-0.8%1.0%-3.7%2.0%3.6%2.1%3.6%
061Industrial chemicals-2.2%-0.4%-10.2%0.2%3.2%0.4%3.4%
062Paints and allied products-0.5%-0.6%-1.9%8.0%6.3%3.7%4.1%
063Drugs and pharmaceuticals-0.1%1.4%2.5%2.4%2.2%3.9%4.4%
064Fats and oils, inedible-1.4%8.9%-10.8%-2.8%12.2%2.1%3.4%
065Agricultural chemicals and chemical products-1.0%1.0%-17.3%3.7%4.5%1.5%3.5%
066Plastic resins and materials0.7%4.0%-1.1%-3.1%4.1%0.6%2.8%
067Other chemicals and allied products-0.6%0.4%2.0%6.6%4.5%2.9%3.0%
07RUBBER AND PLASTIC PRODUCTS-0.1%0.8%-1.1%6.3%5.3%2.9%3.3%
071Rubber and rubber products0.3%1.8%0.8%6.6%4.5%2.2%3.1%
072Plastic products-0.1%0.5%-1.7%6.2%5.5%3.1%3.4%
08LUMBER AND WOOD PRODUCTS-0.9%0.7%-3.2%-5.7%4.4%2.8%2.0%
081Lumber-2.1%4.3%-4.9%-17.9%3.3%1.4%0.8%
082Millwork-0.3%1.3%-1.9%3.5%6.0%4.3%3.1%
083Plywood-0.3%0.6%-2.0%-10.3%6.2%3.6%1.2%
084Other wood products-0.7%-2.9%-5.7%0.1%3.4%2.7%2.2%
085Logs, bolts, timber, pulpwood, woodchips and other roundwood products-2.1%-2.2%-6.8%-0.1%1.4%0.7%1.5%
086Prefabricated wood buildings & components-0.3%0.6%2.0%4.3%7.4%5.0%3.4%
087Treated wood and contract wood preserving-0.8%-0.9%3.1%-1.0%5.4%3.1%2.2%
09PULP,PAPER, AND ALLIED PRODUCTS0.5%2.8%1.1%6.2%5.4%3.0%2.8%
091Pulp, paper, and prod., ex. bldg. paper0.5%2.7%-0.6%6.1%4.8%2.7%3.0%
092Building paper & building board mill prods.5.1%20.0%30.6%-5.5%13.1%7.1%2.7%
094Publications, printed matter & printing material0.2%1.3%2.6%8.3%6.0%3.4%
10METALS AND METAL PRODUCTS1.2%1.0%1.0%3.3%6.9%3.8%3.9%
101Iron and steel0.0%-4.4%-2.8%-1.7%6.5%3.0%3.7%
102Nonferrous metals4.6%7.8%3.2%2.2%7.5%3.8%4.6%
103Metal containers-0.1%0.3%-3.1%8.9%6.1%4.1%3.4%
104Hardware0.0%-0.4%-0.3%6.3%4.9%3.2%2.9%
105Plumbing fixtures and fittings0.2%1.4%1.7%4.9%3.8%3.1%3.1%
106Heating equipment-0.4%1.4%3.5%9.5%7.4%5.1%4.4%
107Fabricated structural metal products0.0%0.4%2.6%9.6%8.9%5.6%4.2%
108Miscellaneous metal products0.1%1.4%2.5%6.8%5.0%3.1%2.7%
11MACHINERY AND EQUIPMENT0.0%2.0%4.2%6.6%4.6%2.8%1.9%
111Agricultural machinery and equipment-0.3%0.6%2.0%8.4%6.3%3.8%3.4%
112Construction machinery and equipment-0.2%0.7%4.8%8.1%5.8%3.7%3.4%
113Metalworking machinery and equipment0.4%2.8%6.5%6.9%4.8%3.1%2.5%
114General purpose machinery and equipment0.2%2.5%6.3%9.3%6.6%4.3%3.9%
115Electronic computers and computer equipment-1.8%0.1%249.8%56.3%30.1%12.4%2.7%
116Special industry machinery and equipment0.5%2.4%5.1%7.8%6.2%3.8%2.6%
117Electrical machinery and equipment-0.2%1.7%2.4%4.8%3.2%1.9%0.9%
118Miscellaneous instruments0.2%2.4%5.0%6.5%4.3%3.1%2.4%
119Miscellaneous machinery0.1%2.0%4.6%5.3%3.6%2.2%2.3%
12FURNITURE AND HOUSEHOLD DURABLES0.4%0.9%1.7%5.6%4.6%3.1%2.5%
121Household furniture0.8%1.0%-0.7%5.2%4.5%3.1%2.7%
122Commercial furniture0.6%2.0%3.8%7.4%6.5%4.2%3.3%
123Floor coverings-0.4%1.1%0.9%1.9%1.6%1.5%2.3%
124Household appliances-0.5%-1.0%0.5%5.8%3.7%2.4%1.9%
125Home electronic equipment-0.4%1.5%2.3%6.0%4.1%2.2%-0.2%
126Other household durable goods1.0%1.2%3.2%4.9%4.5%2.8%2.2%
13NONMETALIC MINERAL PRODUCTS0.0%2.7%5.4%8.5%6.2%4.3%4.1%
131Glass0.6%1.0%3.4%5.9%4.5%3.5%2.2%
132Concrete ingredients and related products0.6%5.6%9.1%9.1%7.0%5.4%4.8%
133Concrete products-0.8%2.5%7.9%9.9%7.2%5.3%4.5%
134Clay construction products ex. refractories0.4%0.3%4.4%5.8%4.4%2.8%2.1%
135Refractories-0.6%1.1%1.6%7.2%4.7%3.6%4.0%
136Asphalt felts and coatings2.3%1.1%6.3%8.3%6.9%4.2%5.5%
137Gypsum products0.4%3.6%1.9%8.7%8.1%5.2%4.6%
138Glass containers0.0%3.4%0.9%9.4%6.3%3.9%3.4%
139Other nonmetallic minerals-0.5%2.3%2.0%7.9%5.1%2.9%3.9%
14TRANSPORTATION EQUIPMENT0.0%0.9%2.3%3.3%2.5%1.8%1.7%
141Motor vehicles and equipment-0.1%0.2%0.9%3.0%2.3%1.7%1.3%
142Aircraft and aircraft equipment0.2%2.7%5.8%3.9%2.8%1.9%2.5%
143Ships and boats0.2%0.7%3.3%4.5%3.5%2.3%2.6%
144Railroad equipment0.0%0.6%1.8%1.7%0.9%1.0%2.1%
149Transportation equipment, n.e.c.0.0%-1.7%-2.3%4.2%3.2%2.4%1.9%
15MISCELLANEOUS PRODUCTS1.5%3.8%7.9%7.0%5.6%4.0%3.5%
151Toys, sporting goods, small arms, etc.1.2%5.4%9.3%9.0%6.1%3.7%2.7%
152Tobacco products, incl. stemmed & redried3.1%6.4%15.9%10.9%9.0%7.2%6.0%
153Notions0.0%-0.1%5.0%7.2%5.1%3.2%3.7%
154Photographic equipment and supplies1.8%2.7%6.8%6.6%4.8%3.2%2.7%
155Mobile homes0.5%1.3%-1.0%5.3%10.0%6.3%
156Medical, surgical & personal aid devices0.7%2.1%3.5%3.0%2.4%1.6%1.3%
157Other industrial safety equipment0.3%2.5%5.4%6.7%5.1%3.1%2.4%
159Other miscellaneous products1.0%2.8%5.1%8.2%6.1%3.9%3.1%

IPIC LIFO Resources and Links

PPI Table 9PPI Table 11

Resources

Sec. 473 Relief Estimate Request Form
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Auto Dealer IPIC LIFO Case Study
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2023 Top LIFO Opportunities & Strategies Guide
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How to Easily Implement LIFO
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Best LIFO Practices & Review
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LIFO Election Benefit Analysis
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