LIFO Inventory Solutions
IRS-Preferred IPIC Method Usually Yields Better LIFO Results
The IRS-preferred method, IPIC (Inventory Price Index Computation), yields better tax results for the majority of businesses.
The IPIC method bases inflation measurements on data published by the Bureau of Labor Statistics (BLS). The BLS indexes are a domestic measure of inflation and don’t take into consideration the efficiencies realized through buying inventory overseas or the buying power a company may have relative to others. These indexes are generally surprisingly better than conventional measures of inflation.
Traditional Method LIFO |
IPIC Method LIFO |
|||
| Ending Inventory | $5,000,000 |
Ending Inventory | $5,000,000 |
|
| Inflation | 2% |
Inflation | 10% |
|
| LIFO Reserve | $100,000 |
LIFO Reserve | $500,000 |
|
| Federal Tax Rate | 35% |
Federal Tax Rate | 35% |
|
| Additional Cash Flow | $35,000 |
Additional Cash Flow | $175,000 |
|
Companies considering a LIFO election should look at both a traditional LIFO method as well as the IPIC method. For companies already on LIFO, converting to IPIC will likely provide an improved benefit. Running parallel computations will determine which method yields the best benefit in either case.
Many companies choose the IPIC method because:
- IPIC provides a better tax benefit.
- The computation is simpler than conventional methods and less administratively burdensome.
- The IRS affords audit protection for the previous LIFO method.
