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Inventory Management for Companies Using LIFO IPIC Valuation Methodology

As management is looking for avenues to reduce costs, optimizing the use of available working capital and cash flows from operations, efficient inventory management could be a very useful tool. For companies using last in, first out (LIFO) inventory price index computation (IPIC) inventory valuation methodology, managing the year-end inventory quantities and mix may be an effective tax-planning strategy.

Since IPIC method replaces a company's internal inflation/deflation calculations with external inflation/deflation factors taken from the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) and Producer Price Index (PPI) reports, the company could find itself in the position of experiencing internal inflation, while the underlying PPI or CPI reports show deflation for the taxpayer's inventory. Since IPIC LIFO method is based on domestic price data, it is possible that companies experiencing deflation could realize an inflationary benefit. Another factor that management should consider is that since BLS weights do not take into account the company's inventory mix, they can potentially misrepresent the overall internal inflation factor of the company. For many businesses, published indexes provide more tax benefits than internally generated indexes. The published indexes will reduce taxable income when the inflation shown by the published indexes is greater than actual inflation.

The BLS indexes are published monthly; therefore, a company not using the retail method may elect to use a monthly index that is published before its year-end. Since the above-noted price indexes are not obtainable until after year-end, it is difficult for management to estimate the LIFO impact throughout the year and particularly during the last quarter, which will be very useful for year-end inventory management and tax planning purposes.

The price trend in 2011 shows little inflation (or even deflation) due to the slow recovery from the last economic recession. Based on our review of the inflation indexes for the period from January 1, 2011 through June 30, 2011, please find listed below the price trends compared to the index as of December 31, 2010 for a few selected inventory items based on the following criteria:

• Price trends of inventory items representing IPIC product codes 1 through 15
• List of some inventory items with inflation of 20% and over as of June 30, 2011 compared to the price index as of December 31, 2010
• List of some inventory items with large deflation as of June 30, 2011 compared to the price index as of December 31, 2010

Price trends of inventory items representing IPIC product codes 1 through 15

List of some inventory items with inflation of 20% and over as of June 30, 2011 compared to the price index as of December 31, 2010

List of some inventory items with large deflation as of June 30, 2011 compared to the price index as of December 31, 2010

For further information please contact Sylesh Babu at sbabu@BlackmanKallick.com or 312-980-3307 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.