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Positive Territory for Week 2

   
In the second week of May, independent grocers narrowly surpassed same store sales from the same period in 2015. Sales were up 0.3 percent and customer counts were up 1.4 percent. A poor start to the month still leaves May with additional ground to make up, but a positive week two is a good start.
Same Store Sales        
% Change from last year
Same Store Sales – Previous Months
BGBC Partners Tax Update: LIFO Inventory Method Update
   
As a grocery store owner one of the more significant aspects of determining your taxable income is deciding how your inventory is accounted for and reported. Many store owners use the Last-In-First-Out (LIFO) inventory method. A few years back in 2013, former Congressman David Camp as the powerful Chairman of the Ways and Means Committee included the repeal of LIFO among a long-list of tax reform items. This idea was never passed. So where are we today on LIFO? That is what this segment of our Tax Update will discuss.

For starters let’s clarify what the general requirements are for accounting for inventory. In general, the regulations associated with IRC §471 provide the following two tests which must be met when valuing inventory: (1) inventory accounting must conform to the best accounting practice in the trade or business, and (2) it must clearly reflect income.

First, the rule states that inventory accounting must conform to the best accounting practice in the trade or business. This allows for you as a grocery store owner to account for your inventory differently than a clothing manufacturer does or other types of businesses. In addition, it requires you to use a methodology that reflects your standard business practices.

Second, the rule states that it must clearly reflect income. This part of the rule was the main reason for requiring inventory accounting by Congress in 1918. Prior to that time, Congress felt that the failure to use inventories resulted in the improper matching of sales and cost of goods sold. Often times, this resulted in a deferred payment of income taxes. As a basic example, if you purchased inventory on the last day of the year, you could deduct the cost of that inventory in the year of purchase. This lowered your taxable income in the year you purchased the inventory. If you sold the inventory the following year, you would then pay the income tax on that year’s return. While the total amount of income subject to tax during the two-year period is the same, you would have deferred payment of those taxes by a full year. The inventory accounting rules are in place to ensure the matching of the revenues with the associated costs (i.e., you recognize the income from the sale of the inventory above in year two, and you recognize the costs of that inventory in year two, as well).

For tax purposes taxpayers generally use average cost, FIFO, or LIFO methods. Under the FIFO method, the first goods purchased are the first goods sold. By using FIFO, ending inventory is then valued at the most recent purchase price. In contrast, the LIFO method assumes the last goods purchased are the first items sold. Therefore, the ending inventory amount is determined using older costs.

In periods of rising costs, ending inventory has a higher value under the FIFO method than under the LIFO method. Typically FIFO values reflect ending inventory at an amount equal to the actual costs the goods remaining in inventory, whereas LIFO results in an ending inventory closer to historical cost.

Since LIFO is widely used by retailers and grocers and generally produces lower income taxes, it is good news that the tax code still allows the use of LIFO. One report estimated that the elimination of the LIFO method for tax purposes would generate $70 billion in revenues for the IRS over a 10 year period. That is a lot of tax dollars for Congress to leave on the table, so where are we.

Well, the Obama Administration recently included another provision to repeal LIFO in its 2017 budget. However, key members of Congress have informally stated that they do not see it passing. So the good news is that we probably don’t have to be too concerned about repeal, but be assured that this column will quickly notify you if something changes!

BGBC Partners, LLP is a full service certified public accounting and business consulting practice.  

For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).


For More Information,
Contact Mark Ehleben
877-435-9400 x1402
marke@fmssolutions.com
8028 Ritchie Highway | Suite 212 | Pasadena, MD 21122


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