The AICPA and the National Automobile Dealers Association have urged the IRS and Congress to extend the relief provided under IRC Section 473 for companies using LIFO that experienced a decrease in their closing inventories caused by government actions in response to COVID-19. Will there be any help from the IRS or Congress? Essentially allowing small business taxpayers to not report inventory for tax purposes or worry about UNI UNICAP. If this exception is met, for tax return purposes the business is no longer required to account for inventories but can deduct amounts paid to acquire or produce materials and supplies in the taxable year in which the material and supplies are first used or consumed in the taxpayerвЂ™s operations. Some businesses might fall under this exception if their gross receipts were severely impacted during the 20 taxable years due to the pandemic. Small businesses are generally defined as corporations or partnerships that have an average of less than $26,000,000 (2021) or $27,000,000 (2022) gross receipts when evaluating the 3 previous taxable years.

When choosing what permissible method could be used going forward when electing out of LIFO, taxpayers should confirm they are not eligible for small business inventory exceptions.

The limitation on making such a method of accounting change is that the taxpayer would be required to wait 5 years before being able to utilize LIFO again for US GAAP and tax purposes. While this will still require an income inclusion of the entire LIFO reserve, the inclusion could be spread over four years as opposed to picking up a large amount all in one year. If inventory pools are already utilized, the taxpayer should review the inventory pools to see if any adjustment can be made to limit the taxable income impact.ДЄ potential solution could be for the taxpayer to elect out of LIFO to another permissible method. For example, an automobile dealer using specific identification for new car inventory could consider a pool method including used cars and parts for a potential planning solution. If it is decided to remain on a LIFO method, potential benefit may be achieved if there is an adjustment from a specific identification method to a pooled index method.

In addition, the ability to offset future income with higher priced inventory could lead to even more benefit if the tax rates increase. Recognizing income at a time that is generally considered to be a low tax period could be advantageous. Provided that the supply chain gets better, and inventory can be restored, the ability to build back a LIFO reserve deferral could be quicker than one would anticipate due to the inflated purchase costs. If a business is required to utilize inventory layers that are related to the prior taxable years that are significantly less than current costs, the potential taxable income increase should be identified, and tax planning should be considered.Д«usinesses may intentionally choose to stay on the LIFO method. Taxpayers should be monitoring their COGS and higher sales prices due to inflation. So, is there any relief available? Potentially. That is a significant tax increase for an unexpecting taxpayer, and even with other potential increases in operational expenses, such as salaries and wages, could still require an increased federal tax payment. For example, the National Automobile Dealers Association estimates approximately 50% of dealerships use the LIFO accounting method and projects that supply chain disruptions could lead to an additional $1.7 billion in taxes for the industry in 2022. While you might view the examples that were provided as immaterial, industries that commonly use LIFO - including pharmaceutical distributors, specialty retailers, industrial equipment, farm equipment, furniture businesses, and the automotive industry- are seeing significant increases in their tax bills. This could be a surprise to many taxpayers and may only get worse through the 2022 taxable year. Company A would recognize taxable income of $17,050, increasing their taxable income by 24%, even though the same number of sales took place. The gross receipts would remain at $41,250 but COGS would utilize the 2020 inventory layer.

Using turbotax for s corp