An eligible small business may elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO method[i].
The simplified dollar-value method of pricing inventories is a dollar-value method of pricing inventories under which[ii]:
- the taxpayer maintains a separate inventory pool for items in each major category in the applicable government price index, and
- the adjustment for each such separate pool is based on the change from the preceding taxable year in the component of such index for the major category.
The applicable government price index is the producer price index published by the Bureau of Labor Statistics or in the case of a retailer using the retail method, the consumer price index published by the Bureau of Labor Statistics[iii].
A major category means[iv]:
- in the case of the producer price index, any of the 2-digit standard industrial classifications in the producer prices data report, or
- in the case of the consumer price index, any of the general expenditure categories in the consumer price index detailed report.
The simplified dollar-value method uses multiple inventory pools. The change in the published index for the general category to which the pool relates is used as the annual price change component.
The annual change is measured from one month in one calendar year to the same month in the next calendar year, established by the taxpayer. Further, a change to another month cannot be made without permission from the IRS.
A taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer for the three preceding taxable years do not exceed $ 5,000,000[v].
In the case of a tax payer who is a member of a controlled group, all persons which are component members of such a group are treated as one taxpayer for purposes of determining the gross receipts of the taxpayer[vi]. Taxpayers are treated as members of a controlled group if they would be treated as a single employer for purposes of the targeted jobs credit.
A taxpayer must discontinue the simplified dollar-value method in the first tax year when it no longer meets the $ 5,000,000 average annual gross receipts test. The taxpayer must change to any other permissible method with IRS approval.
The simplified dollar-value method election is available without IRS consent. It applies to the tax year for which it is made and to all succeeding tax years for which the taxpayer is an eligible small business. The election may be made only if the taxpayer files the taxpayer’s income tax return for the tax year.
The election applies to the taxable year for which it is made and to all subsequent taxable years for which the taxpayer is an eligible small business[vii].
[i] 26 USCS § 474 (a).
[ii] 26 USCS § 474 (b) (1).
[iii] 26 USCS § 474 (b) (2).
[iv] 26 USCS § 474 (b) (3).
[v] 26 USCS § 474 (c).
[vi] 26 USCS § 474 (d) (1).
[vii] 26 USCS § 474 (d) (2).