LIFO Case Studies
Conversion from Former IPIC Method to Revised IPIC Method Increases LIFO Reserve By $3.1 million
A fertilizer manufacturer with revenues of $180 million and an inventory value of $10.9 million elected LIFO in 1980. While the calculation was performed by a number of employees and CPAs over the years, in the late 1990s, the company elected to convert to IPIC LIFO. In 2007, the company hired a new CPA who raised concerns about the LIFO calculation. The CPA had worked with SourceCorp on many occasions and immediately asked us to review the calculation.
Upon review, SourceCorp discovered several errors in the LIFO calculation and methodology. SourceCorp elected the new IPIC LIFO method on the client’s behalf, by preparing Forms 3115 and 970 which were made available by the IRS in 2001. By changing the LIFO method, SourceCorp corrected the errors and also provided the client with audit protection offered by the IRS. As an added benefit, the client’s LIFO reserve increased by $3.1 million in 2008, creating additional tax savings of $1.2 million.
LIFO Election Yields $1.8 million LIFO Reserve & $723,000 Cash Savings
A $125 million fire engine manufacturer experienced substantial growth over several years. While the company expected 2008 to be a profitable year, they predicted that the current economic environment would stifle growth. The company needed to expand, but did not have cash available to do so. Their CPA immediately recognized the potential benefit that a LIFO election could provide. Because the company had not experienced significant increases in cost of goods sold, they were initially hesitant to explore LIFO.
However, while internal inflation was not significant, the published indexes under the IPIC method yielded an inflation rate of 6.4 percent. When applied against the client’s 2008 year ending inventory of $30.7 million, the company realized a LIFO Reserve of $1.8 million. The result was a cash savings of $723,000 that could be used to expand the business.
Traditional LIFO Method Conversion to IPIC LIFO Method Provides LIFO Reserve of $18.6 million and Tax Savings of $6.8 million.
This SourceCorp client is a distributor of mechanical tubing and boasts the largest single-location inventory of products in the country housed in a 250,000-square-foot facility. The company elected LIFO for the 2007 tax year, using a traditional methodology based on internal price changes. They experienced 3.6 percent inflation on year-end inventory of $44.3 million for 2007. This yielded a LIFO reserve of $1.2 million, translating into a tax savings of $474,000.
At the end of 2008, the company’s inventory had grown to $67.5 million. Throughout the year, they experienced significant internal inflation with prices rising 19.2 percent. The result was an increase to the LIFO reserve of $7.7 million and a cash savings of $3 million.
Despite a huge increase to the LIFO reserve for 2008, SourceCorp performed an IPIC LIFO analysis to determine if the published inflation indexes would create a larger tax benefit than the current method. By changing to the IPIC LIFO method, the company realized an inflation rate of 39.9 percent, resulting in a cumulative LIFO reserve of $18.6 million and producing tax savings of $6.8 million for 2008.
