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 Snapshot
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.

Considerations
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.

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Categories: COVID-19, Manufacturing & Distribution

Managing Cash Flow After Disruption

Jun 09, 2021

COVID-19 has fundamentally changed the way in which businesses operate. From remote working to labor shortages, businesses have been forced to think innovatively to survive in a post-pandemic world. Revenue and cash flow have no doubt been a point of unease. During a recent WVC survey, more than 50% of respondents noted their number one concern being cash flow and access to capital. In a time of crisis, the focus is less on revenue and profits and more on liquidity and cash flow. In a distressed organization where resources are likely constrained, time is better spent on developing an accurate cash flow.

William Vaughan Company has developed a 13-week cash flow forecast tool for businesses to assess short-term cash demands. This model offers the most granular view into the money moving in and out of a business which means any short-term planning shortfalls can be addressed immediately. Click here to download.

Here are some best practices for cash flow forecasting business owners should consider if and when they find themselves in a crisis:

  • Take control – Prioritize your expenses from critical to nonessential. With precise insight into your cash peaks and valleys, it’s easier to prepare contingency plans ahead of projected pinch points.
  • Let the data drive decisions – Short-term cash flow forecasting should be driven by your data. Critical decisions can be made effectively with the numbers at hand. Most importantly, the 13-week cash flow is an objective, repeatable model that can eliminate false optimism among leadership.
  • Communicate – Use this as an opportunity to create an open dialogue between management and other key team members. In addition, it can also help expedite key decisions for your lenders.
  • Think outside the box – Think about other financing opportunities. This will also identify fixed versus variable expenses in which you can build scenarios from the model and “stress test” it against various conditions.

As businesses begin the long road to recovery, thinking strategically and taking action to minimize negative impacts will decide who remains competitive. Cash flow forecasting is just one of the many tools business owners can use to ensure their sustainability. With a thoughtful approach, you will gain the visibility needed to potentially right the ship.

How we can help
Don’t go at it alone! If you’re not sure how to assess your current environment and need guidance on utilizing cash flow forecasting, contact a William Vaughan Company advisor today!

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wvco.com | 419.891.1040

Categories: Uncategorized

SBA Announces Restaurant Revitalization Fund Registration & Application Date

Apr 27, 2021

Today, the SBA announced it will open registration for the Restaurant Revitalization Fund (RRF) on Friday, April 30, 2021, at 9 am ET. Applications will officially be available on Monday, May 3, 2021, at noon ET and will remain open for any eligible entity until the funds are completely exhausted. In order to prepare for the launch of the RRF, the SBA recommends applicants become familiar with the application process by doing the following:

  • Register in advance for an account at restaurants.sba.gov. This registration will go live on Friday, April 30, 2021, at 9 a.m. EDT.
  • Review the official guidance, program guide, FAQs, and sample application published by the SBA.
  • Prepare your required documentation.
  • When the portal opens on Monday, May 3rd, 2021 work with your point-of-sale vendor or visit restaurants.sba.gov to submit your application. The SBA noted if you are working with a point-of-sale vendor, registration prior to submitting the application is not required.

The SBA will host two webinars on Tuesday, April 27, and Wednesday, April 28 covering the Restaurant Revitalization Fund program details and how to submit an application. To register for one of the webinars, click below:

While the webinars are limited to the first 20,000 registrants, recordings will be made available on the SBA’s YouTube Channel.

The SBA will be prioritizing funding applications from businesses owned by women, veterans, and socially and economically disadvantaged individuals for the first 21 days. However, all eligible applicants are strongly encouraged to submit their applications as soon as the portal opens. Once the 21 day priority period has passed, all eligible applications will receive funding on a first-come, first-serve basis.

If our team can be of assistance please reach out to us. We will continue to update and monitor this topic as more news is shared.

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Kristin Metzger, CPA
Restaurant Practice Leader
kristin.metzger@wvco.com | 419.891.1040

Categories: COVID-19, Restaurant & Hospitality

SBA Releases New Forms In Preparation for Paycheck Protection Program Re-Opening

Jan 11, 2021

The U.S. Small Business Administration (SBA), in consultation with the Treasury Department, announced the Paycheck Protection Program (PPP) will reopen today initially for community financial institutions (CFIs) that serve minority- and women-owned businesses to make loans. Specifically, CFIs can begin making loans to first-time PPP borrowers today and second-time PPP borrowers on Wednesday.

The SBA and Treasury said the PPP would open to all lenders a few days after the opening for CFIs, but they did not specify a date. Borrower loan application forms were also released:

Form 2483 is updated from previous iterations starting with the original PPP program. Form 2483-SD is a new form for qualified PPP borrowers to seek a second draw of a forgivable loan as they try to navigate economic seas churning in the throes of the COVID-19 pandemic.

Finally, the SBA released additional guidance outlining top-line summaries of the first-draw and second-draw PPP loans and a pair of procedural notices.

For more information regarding the PPP and second-draw loans under the Consolidated Appropriates Act, 2021, check out our latest webinar here or review our PPP Application Guide here. As always, connect with your William Vaughan Company advisor for questions or concerns.

Categories: COVID-19

Congress Approves New Round of PPP and Rules on Deductibility

Dec 22, 2020

What happened?

Congress has been meeting seemingly around the clock in an effort to pass a bill before heading home for the holidays which, among other things, would provide a much-needed second round of Paycheck Protection Program (PPP) Stimulus. As of late Monday, December 21st, they were finally able to agree on negotiations and vote to approve this bill. President Trump is expected to sign this bill into law over the next few days.

What are the details?

Updates to the existing PPP program
First and foremost, the issue regarding the deductibility of expenses used for PPP1 loan forgiveness was finally resolved as Congress agreed, despite the push-back of the Treasury, to include legislation that allows for the deductibility of such expenses. This means that businesses who received a PPP1 loan (application deadline of August 8, 2020) that has been forgiven, or that they expect to be forgiven, can now deduct those related expenses from taxable income. This will result in a tax-free infusion of cash into many small businesses across America, which is in line with the original Congressional intent.

In addition to the deductibility of those expenses, additional items have been added to the list of qualified expenses for loan forgiveness. Among these are operating expenditures related to software or cloud computing that facilitates business operations, property damage costs (due to looting/vandalism that occurred during 2020 and were NOT covered by insurance), certain supplier costs, and covered worker protection expenses related to the adaptation of businesses per regulatory requirements imposed by the CDC, Health and Human Services, etc. These additional expenditures are only allowable for businesses that have not yet applied for forgiveness.

Congress also provided for modified covered periods in relation to PPP1 which gives businesses the option to select a covered period that falls anywhere BETWEEN 8 and 24 weeks after the loan origination date.

The bill repeals the requirement that EIDL (Economic Injury Disaster Loan) advances be deducted from the PPP forgiveness amount, and it allows the Employee Retention Credit to be claimed by PPP Loan recipients.

Finally, also retroactive to PPP1 is a much-desired streamlined application process for loans amounting to $150,000 or less. These applications require qualified businesses only to submit a one-page application that identifies the number of employees the borrower was able to retain as a result of receiving the PPP loan, the estimated amount of loan proceeds spent on payroll costs, and the total amount. Beyond that, borrowers need to simply attest to the fact that they complied with PPP requirements, and they are done. Gone is the need for hours and hours of painstaking calculations and document retrieval.

PPP2 Stimulus
This wave of stimulus will appropriate roughly $900 billion for a host of provisions, but for the purposes of this post, we will focus on new funding for the Paycheck Protection Program (PPP2) specifically. To begin, the maximum loan amount allowed in this round is $2 million, down from $10 million with PPP1, and it will target two groups specifically:

1. A second draw for the hardest hit borrowers from PPP1. Items to consider for qualifications of this group are as follows:

  • 300 or fewer employees; and
  •  25% gross receipts decline in any quarter in 2020 compared with the same quarter in 2019
    • EIDL and PPP proceeds are NOT included in gross receipts
    • Based on calendar quarter (not any consecutive 3-month period)
    • Tiered system where certain loans only require self-certification while others will need supporting documentation
  • Full use of your PPP1 loan amount
  • All loans will be subject to SBA review – congress is appropriating funds to the SBA to support manpower needed to conduct reviews of PPP loan applications so it can be expected that there will in fact be reviews by the SBA

2. First time PPP borrowers. Eligibility is as follows:

  • Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
  • Sole proprietors, independent contractors, and eligible self-employed individuals
  • Accommodation and foodservice businesses that average less than 500 employees per physical location
  • Non-profits, including churches
    NEW in this round is 501(c )(6) and destination marketing organizations with 150 or fewer employees – think economic development, chambers of commerce, tourism, etc. – subject to certain lobbying thresholds

The structure of PPP2, including the loan calculation formula, eligible use of proceeds, and forgiveness feature are very similar to that of the updated PPP1. In general:

  • The loan amount will be computed as 2.5 months of payroll. **Hotels and restaurants can get up to 3.5 times their average monthly payroll costs (subject to the $2 million maximum)**
  • Eligible uses of PPP2 funds will include payroll, rent, utilities, and mortgage interest just as in PPP1 as well as the additional eligible expenses noted in the “Updates to PPP1” section above.
  • PPP2 loan forgiveness will be tax-free and related expenses are deductible.
  • PPP2 loans will follow the new simplified forgiveness process.

What should I do now?
It is expected that the SBA will begin accepting PPP2 loan applications sometime in January, so now is the time to begin considering the need for a second PPP loan and whether your business satisfies the requirements outlined above. With the PPP forgiveness expense deductibility question answered, you may need to revisit your tax projections. We also recommend that you consider taking advantage of the Employee Retention Credit if you are newly eligible.

Watch for additional WVC resources including blog posts and webinars with more details on PPP2 and other items included in this round of stimulus. Contact your WVC advisor to discuss the nuances of this new stimulus package and how it will impact your business.

Categories: COVID-19

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