Navigating LIFO Inventory Methods During Global Supply Chain Disruptions
Dec 20, 2021
State of the Global Economy
The same issues have been covered in the news cycle for months; supply chain malfunctions, production shortages, inflation, increased tariffs… all the reasons why businesses are facing heightened costs of resources this year. COVID-19-related disruptions have affected distributors and manufacturers worldwide, with gradual increases in the consumer prices index every month since the third quarter of 2020 (apart from May ‘21.) Numerous products including crude oil and petroleum products, natural gas, leather, lumber and wood, chemicals, and metal products have all seen substantial inflation (from 25% – 200%) in the last twelve months.
As costs go up, one tax leveraging option for those required to maintain inventories is the LIFO (last-in, first-out) inventory method. By using LIFO, goods sold throughout the year are deemed to come first from any goods purchased or produced during that year, then from the beginning inventory. As a result, inflation on items in the ending inventory is already included in the cost of goods sold, which may result in a lower taxable income.
LIFO is an alternative inventory valuation method, used by companies during periods of increased inflation to defer significant taxation. When adopting a LIFO inventory method, taxpayers can measure the effects of inflation on their internal and external prices by assuming the most recently purchased items are being sold first. This is achieved through an “inventory price index computation method,” using indexes published by the Bureau of Labor Statistics.
First, the taxpayer must ascribe value to all inventory (including beginning inventory) at cost. Then, say the LIFO method was adopted in the tax year 2020, the taxpayer should value all inventory at cost, ratably, for 2020 through 2022 and account for any necessary adjustments. In theory, the result of those adjustments would reflect the impact of inflation on company inventory and would then be deducted from taxable income and removed from the balance sheet.
It is required all taxpayers adopting the LIFO method for tax purposes, apply a LIFO computing method to book income. Additionally, all financial statements issued by the taxpayer must reflect computation under a LIFO method. To adopt LIFO, taxpayers must attach Form 970, Application to Use LIFO Inventory Method, to their federal income tax return.
Adopting a LIFO inventory method may not benefit all taxpayers. Companies considering the use of a LIFO method for the 2021 tax year should first perform a cost-benefit analysis in order to answer the following questions:
- What are the potential tax savings for the 2021 tax year if the company switched to LIFO?
- Historically, what trends has the company experience during periods of inflation?
- Do historic trends and potential tax savings warrant a switch to a LIFO inventory method?
- What costs are associated with implementing & maintaining LIFO computation in-house?
- Are the potential tax savings greater than the projected costs?
As always, our team of advisors is available to help you determine the best approach for your given situation.
Categories: COVID-19, Manufacturing & Distribution
Gift-giving and Taxes
May 25, 2017
The recipient of a gift need not worry about the tax consequences; receipts of gifts are non-taxable events. However, that is not always the case for the giver. Every year the IRS allows for the tax-free transfer of a specified amount of monetary gifts. For 2017 this amount stands at $14,000 per person, per year. Amounts given to any one individual, by any one individual, during a tax yearbring about no consequences as long as they are at or below $14,000. For example, a husband and wife can each give $14,000 in cash ($28,000 total) to each of their grand-kids every year, with no resulting tax or return filing consequences.
Gifts in excess of this annual exclusion can also be tax-free; however, these gifts are required to be reported against the givers lifetime gift and estate exemption. The total lifetime exemption for 2017 stands at $5.49 million per individual. Gifts made during the year in excess of the annual exclusion ($14,000) require the giver to file a gift tax return. This return discloses the excess gifts given annually as well as tracking their lifetime excess/remaining exclusion. Typically annual gift returns come with no tax due; however, these returns reduce the tax-free amount allowed upon death and could have potential tax consequences down the road.
Bottom line? If you have a large estate and make any large gifts during the year, consult your tax advisor. We may be able to offer advice on how to better structure these transactions.
– Courtney Elgin, CPA
Categories: Other Resources, Tax Compliance, Tax Planning
Planning Ahead for Retirement
May 22, 2017
Transferring Your Retirement Savings?
When moving around your retirement savings, it is always best to have a plan. There are several options available to you when changing a job or just changing your retirement plan.
- Lump sum withdraws from your 401(k) from your old employer. Generally, this option is not advisable unless, in dire need of cash, as it can considerably reduce your retirement savings. Also, this could end up boosting you up into a higher tax bracket. Either way, you’ll end up paying more taxes.
- Leave the money in your old employer’s 401(k) plan. Generally, once you reach retirement age, your former employer may require you to withdraw the balance. The balance may also be left in the old plan temporarily while you look into new plans and find the right one for you. Unfortunately this not always an option. If your vested balance is $5,000 or less, your old employer may require you to take it out upon leaving the company.
- You can choose to have your balance transferred directly to your new plan, if allowed, through your financial institution. This is generally the best decision as the savings go on without any disruption or withholdings.
- Another option, within the transfer option, is to have a check made out to you for the amount and then to deposit the check into your new employer’s plan or an alternate IRA. When using this option, you should be aware of the implications that come along with it, primarily the 60 day window that you must transfer the deposit within. Not doing so can have hefty tax consequences. The full amount will be taxable and if you are under the age of 59 and a half then you will be subject to a 10% penalty. Generally, taxpayers do not knowingly miss the 60 day window and have unwillingly faced financial burdens as a result. Because of this the IRS has cut taxpayers a break and provided a set of rules designed to offer relief from penalties.
Basic Qualifying Factors:
- An error was committed by the financial institution receiving the contribution or
- making the distribution to which the contribution relates;
- The distribution, having been made in the form of a check, was misplaced and
- never cashed;
- The distribution was deposited into and remained in an account that the
- taxpayer mistakenly thought was an eligible retirement plan;
- The taxpayer’s principal residence was severely damaged;
- A member of the taxpayer’s family died;
- The taxpayer or a member of the taxpayer’s family was seriously ill;
- The taxpayer was incarcerated;
- Restrictions were imposed by a foreign country;
- A postal error occurred;
Myriad options exist when rolling your retirement plan assets, including utilizing these new rules in the event an inadvertent violation of the 60-day rollover provision occurs.
Contact your William Vaughan Company advisor for more information and to discuss these rules in depth.
– Matthew J. Babcock, Staff Accountant
Categories: Audit & Accounting, Other Resources
Home Sweet Office
May 10, 2017
Do you have a room in your home that you use just for your business? If so, you could claim a deduction on your tax return for your home office.
Before we get ahead of ourselves, we should acknowledge that you will have to meet certain requirements. However, most are able to deduct a percentage of the costs of running the home such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, some casualty losses, repairs, and improvements as related to the portion of your home used for business.
A “home”, as defined by the IRS, can be a condo, house, apartment, mobile home or boat (with provided amenities). The home can be rented or owned, however, to qualify for the home office deduction you must meet two tax law requirements:
- You must regularly use part of your home exclusively for a trade or business.
- You must be able to show that you use your home as your principal place of business meaning you meet patients, clients, or customers at your home or you use a separate structure on your property exclusively for business purposes.
The IRS doesn’t offer a clear definition of regular use – only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You should qualify by working a couple days a week for a few hours.
Exclusive means that you must use a portion of your home only for your business. If you use a portion of your home for work but also for personal use then you will not meet that requirement. However, you are able to use a portion of a larger room as long as your personal activities do not enter that area. There are two exceptions to the exclusive use rule. If you run a qualified daycare out of your home or store inventory or product samples then you do not have to meet the exclusive use test.
If you are storing inventory or samples in your home, you can still qualify for the home business expense even if you are not using that space exclusive for your business.The inventory will need to be stored in a certain location such as the garage, a closet, or bedroom. However, you will not get the deduction if you have an office or business location outside of your home.
Remember you can only claim this deduction if you are running a business. If the IRS believes it’s a hobby the deduction will not be honored.
– Brittany Jennings, Staff Accountant
Categories: Audit & Accounting, Other Resources, Tax Compliance, Tax Planning
Closing Costs: Selling A Practice to Supplement Retirement
Sep 28, 2016
Are you counting on your practice sale to fund your retirement?
If so, you may need a backup plan. Typically, after taxes and closing expenses, the profit from selling your practice is roughly equivalent to what you would take home from the practice after working an additional 1.5 – 2 years. As a result, many dentists fail to plan their finances for retirement.If you are considering retirement in the next ten to fifteen years, now is the time to start planning.
To start, ask yourself: How much will it cost to live once I retire? If you can’t answer that question, it is time to start calculating. Use your credit card statements and check register. You will need to include taxes, health insurance, medications, mortgage, travel, gas, insurance, repairs, maintenance, phone, clothes, gifts, entertainment, hobbies, food, utilities, and cable. Then, determine a monthly and annual cost of living.
Now is the time to get totally out of debt. Banks place liens on your practice when you borrow money or open a business line of credit. If you have borrowed money, the debt will have to be paid off before, or at the sale of your practice.
What investments and other assets do you own? Do you own stocks, bonds, fixed assets, cash, or money market accounts? How much income will these assets provide after retirement — and is it enough? Currently, social security is still viable, but will likely only fund a small portion of your retirement needs.
Determine whether your future total income from investments, social security, disability insurance, and any other sources will be enough to cover your future budget. If not, then you will either need to reduce your current and future standard of living, or lengthen your timeline for retirement.
The most common solution dentists see as the answer to retirement income is to sell their practice. If that’s your plan, you should probably be looking at other options to supplement your retirement.
If you haven’t started planning yet, now is the time.
- Jennifer Furey, CPA
Categories: Healthcare & Dentistry