§474 Simplified Dollar-value Lifo Method for Certain Small Businesses

Summary

Allows small businesses to use a simpler dollar-value LIFO way to price their inventories for tax. The business must keep a separate inventory pool for each big category in the government price index. Each pool’s change in value is figured by how that category’s index changed from the prior year. The rule uses the Producer Price Index (PPI), except retailers using the retail method use the Consumer Price Index (CPI). Major categories mean the PPI’s 2-digit industry groups or the CPI’s general spending groups. A business is eligible if its average annual gross receipts for the three prior taxable years are $5,000,000 or less. Companies in a controlled group must combine receipts to check eligibility. The business can choose this method without IRS permission. The choice applies to the tax year it is made and to later years while the business stays eligible, unless the IRS agrees to let it stop. LIFO refers to the last-in, first-out inventory method as defined in the tax code. When starting or stopping the simpler method, inventory pools are set up by the index or by regulations, the total dollar amount at the change must match the prior year’s close, and that year becomes a new base year under the rules.