Inventory Value Method Review May Bring Savings

GLORIA MCDONNEL

CPA

HLB Tauges Redpath

gmcdonnell@hlbtr.com

hlbtr.com

Topic: Accounting

As companies continue to face challenging economic times, reviewing a company's method of valuing inventory while completing the current year tax return is a must. Companies may be able to accelerate a loss into the current tax year reducing the current tax burden or generate an overall loss which can be carried back to prior years to refund taxes paid previously.

Most companies utilize first-in first-out (FIFO) or last-in first-out (LIFO) methods of determining inventory value.  Many companies using the FIFO method also have elected to value their inventory using the Lower of Cost or Market method (LCM).  The LCM method allows companies to report the value of inventory at the lesser of 1) the value of the original cost, or 2) the current market value of the product.  In other words, the taxpayer may be able to recognize a loss on de-valued inventory prior to the actual sale of the inventory.

If your business profits continue to take a hit and you are seeing the value of your inventory decline, the LCM method may be a welcome strategy to reduce your tax burden.

Taking advantage of LCM may still be an opportunity for your business in 2009.  Companies can adopt this method until the due date of their 2009 tax return (including extensions).  There are many inventory, tax and accounting considerations to discuss with your accountant before adopting a new inventory value method, however when appropriately applied the LCM method can deliver substantial savings.  Taxpayers wishing to elect the LCM method can file Form 3115, Application for Change in Accounting Method, with their original tax return for the year of change.

For more information regarding the LCM method, please contact Gloria McDonnell, CPA, at gmcdonnell@hlbtr.com.

2010-04-12 00:00:00 -0500