Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
The 1992 LIFO Index is 1.041. This was determined as follows: Car Pool 9212 Model Year 1993 Prior Year Prior Year As of 1991 As of 1991 As of 1992 As of 1992 End Inv Vehicle Extended Vehicle Extended Model Quantity Price Price Price Price Car A 5 $22,000 $110,000 $23,000 $115,000 Car B 6 23,000 138,000 24,000 144,000 Car C 9 26,000 234,000 27,000 243,000 20 $482,000 $502,000 Car Pool Index: $502,000 / $482,000 = 1.041 The 1993 LIFO Index is 1.040. This was determined as follows: Car Pool 9312 Model Year 1994 Prior Year Prior Year As of 1992 As of 1992 As of 1993 As of 1993 End Inv Vehicle Extended Vehicle Extended Model Quantity Price Price Price Price Car A 6 $23,000 $138,000 $24,000 $144,000 Car B 7 24,000 168,000 25,000 175,000 Car C 10 27,000 270,000 28,000 280,000 23 $576,000 $599,000 Car Pool Index: $599,000 / $576,000 = 1.040 It is possible for the price of a vehicle to go down from one year to the next. Such deflation will be accounted for in the index using the same steps which were used to compute inflation. Where no invoice exists or price cannot be reconstructed for a particular vehicle, for a specific year, the assumption may be made this is a new vehicle entering the inventory and no inflation can be assigned. Any such particular vehicle will receive an index of 1.0000. The dealer may submit information to the contrary which should be considered by the agent. See the section on "Pooling" above, for guidance on determining whether a new item is present. Once the indices have been calculated the next step of the LIFO computation will be to determine the LIFO layers to add to the reserve. Please see the Appendix section of this Guide for a comprehensive case study detailing the computation of indices used to compute a LIFO Reserve. 8-22
BLS Sanity Check A simpler means to "ballpark" the taxpayer’s LIFO reserve without a great deal of time is referred to as the Bureau of Labor Statistics (BLS) "sanity check." Depending on how detailed the agent wants to get, you can request the taxpayer’s yearly non-LIFO and LIFO values and recompute the entire reserve in several minute, or you can simply compare the taxpayer’s indexes to the relevant BLS indexes. Factors to keep in mind when using these tables include: 1. Producer Price Index (PPI) - domestic manufacturers 2. Consumer Price Index (CPI) - foreign manufacturers 3. Use quarter closest to taxpayer’s taxable yearend 4. Trucks GVW 10,000 lbs. and under (PPI only) 5. Trucks over 10,000 lbs. GVW (PPI only). Reserve An increment in the LIFO inventory occurs when the end of the year inventory for any pool expressed in terms of base-year cost is in excess of the beginning of the year inventory for that pool expressed in terms of base-year cost. See Treas. Reg. section 1.472-8(a). If there is an increment for the taxable year, the ratio of the total current year cost of the pool to the total base year cost of the pool must be computed. This ratio, when multiplied by the amount of the increment measured in terms of base year costs, gives the LIFO inventory value of such increment. The LIFO inventory value of each such increment is referred to in this section as the "layer" and must be separately accounted for and a record thereof maintained as a separate layer of the pool, and may not be combined with a layer of increment occurring in a different year. On the other hand, when the base-year cost of the pool is less than the beginning base-year cost of the pool, a decrement occurs in the pool for that year. Such a decrement, or liquidation, is to be reflected by reducing the most recent layer of increment by the excess of the beginning of the year inventory over the end of the year inventory of the pool. However, if the amount of liquidation exceeds the amount of the most recent layer of increment, the preceding layers of increment in reverse chronological order are to be successively reduced by the amount of such excess until all the excess is absorbed. The base year inventory is to be reduced by liquidation only after the aggregate of all liquidations exceeds the aggregate of all layers of increment. The liquidation process works the same whether it be under the double extension, link chain or any other method. The LIFO Reserve calculation, just as with the increment valuation, is the same no matter what method of LIFO the taxpayer elects. The equation for the LIFO reserve is as follows: 8-23
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BLS Sanity Check<br />
A simpler means to "ballpark" the taxpayer’s LIFO reserve without a great deal of time is referred<br />
to as the Bureau of Labor Statistics (BLS) "sanity check." Depending on how detailed the agent<br />
wants to get, you can request the taxpayer’s yearly non-LIFO and LIFO values and recompute the<br />
entire reserve in several minute, or you can simply compare the taxpayer’s indexes to the relevant<br />
BLS indexes. Factors to keep in mind when using these tables include:<br />
1. Producer Price Index (PPI) - domestic manufacturers<br />
2. Consumer Price Index (CPI) - foreign manufacturers<br />
3. Use quarter closest to taxpayer’s taxable yearend<br />
4. Trucks GVW 10,000 lbs. and under (PPI only)<br />
5. Trucks over 10,000 lbs. GVW (PPI only).<br />
Reserve<br />
An increment in the LIFO inventory occurs when the end of the year inventory for any pool<br />
expressed in terms of base-year cost is in excess of the beginning of the year inventory for that<br />
pool expressed in terms of base-year cost. See Treas. Reg. section 1.472-8(a).<br />
If there is an increment for the taxable year, the ratio of the total current year cost of the pool to<br />
the total base year cost of the pool must be computed. This ratio, when multiplied by the amount<br />
of the increment measured in terms of base year costs, gives the LIFO inventory value of such<br />
increment. The LIFO inventory value of each such increment is referred to in this section as the<br />
"layer" and must be separately accounted for and a record thereof maintained as a separate layer<br />
of the pool, and may not be combined with a layer of increment occurring in a different year.<br />
On the other hand, when the base-year cost of the pool is less than the beginning base-year cost of<br />
the pool, a decrement occurs in the pool for that year. Such a decrement, or liquidation, is to be<br />
reflected by reducing the most recent layer of increment by the excess of the beginning of the year<br />
inventory over the end of the year inventory of the pool. However, if the amount of liquidation<br />
exceeds the amount of the most recent layer of increment, the preceding layers of increment in<br />
reverse chronological order are to be successively reduced by the amount of such excess until all<br />
the excess is absorbed. The base year inventory is to be reduced by liquidation only after the<br />
aggregate of all liquidations exceeds the aggregate of all layers of increment. The liquidation<br />
process works the same whether it be under the double extension, link chain or any other method.<br />
The LIFO Reserve calculation, just as with the increment valuation, is the same no matter what<br />
method of LIFO the taxpayer elects. The equation for the LIFO reserve is as follows:<br />
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