Interruption of LIFO inventories due to COVID-19 and Sec. 473 relief
A business with a last in, first out (LIFO) inventory that experiences a decrease in LIFO inventory would generally have additional taxable income related to the decrease in LIFO. A LIFO decrement is the excess of the closing inventory from the previous period minus the closing inventory from the current period. Decreases result in a reduction in increments or layers created in previous years.
The various government restrictions implemented in response to the COVID-19 pandemic have severely limited manufacturing capacity and caused major disruptions to foreign trade and the global supply chain. These restrictions have made it extremely difficult for US companies to replace their inventory in 2020, resulting in a significant reduction in inventory levels, and the difficulties continue into 2021. Due to these circumstances, many companies will realize additional taxable income and losses. unexpected tax obligations. , which may continue to hamper their recovery, as they may not have the cash available to pay additional income taxes.
Second. 473 grants relief to eligible taxpayers who experience qualifying LIFO inventory liquidations. Second. 473 applies if a business has had an interruption in the ability to obtain replacement inventory due to a trade embargo or other international event. Under Sec. 473, the company would have three more years to replenish the liquidated inventory. More specifically, Sec. 473 authorizes the Treasury to issue in the Federal Register a notice of determination that a qualified inventory outage of LIFO inventory has occurred.
A “qualified inventory outage” occurs under Sec. 473 (c) (2) when the Secretary of the Treasury, after consultation with appropriate federal officials, determines that (1) any embargo, international boycott or other major disruption in foreign trade has made it difficult or impossible to replace a category of goods for any class of taxpayer during the liquidation year, and (2) the application of Sec. 473 to this category of products and taxpayers is necessary to achieve the purpose of s. 473.
The AICPA recently submitted two letters, in April and August 2021, including detailed examples, which requested safe harbor and accelerated relief in this scenario. In particular, the AICPA recommended that the Safe Harbor provide that the taxpayer will disregard the liquidation for the liquidation year and keep the LIFO layers related to the opening inventory for the liquidation year. Essentially, this would ease the burden of paying additional taxes on the related income and, in general, eliminate the need to file amended tax returns to obtain Sec. 473 relief.
Taxpayers should be aware of these potential consequences due to the disruption of the global supply chain and the overall reduction in inventory levels.
– Elisabeth Young, CPA, JD, LL.M., is a Senior Executive – Tax Policy and Advocacy with AICPA in Washington, DC To comment on this article or suggest an idea for another article, contact Alistair M. Nevius, JD, ([email protected]) the JofAeditor-in-chief, taxation.