The Internal Revenue Service has issued new rules for changing a method of accounting for retail inventory.
Revenue Procedure 2014-48 provides the exclusive procedures under which a taxpayer can obtain the IRS’s consent to change a method of accounting to comply with final regulations on the retail inventory method of accounting.
The final regulations clarify the computation of ending inventory values under the retail inventory method and provide alternative methods for taxpayers using the retail lower of cost or market method of accounting to account for margin protection payments.
Under Section 1.471-8 of the Tax Code, a taxpayer can use the retail inventory method to compute the value of ending inventory at approximate cost (that is, retail cost) or approximate lower of cost or market (that is, the retail LCM), by multiplying the retail selling prices of goods on hand at the end of the taxable year by a cost complement ratio.
The cost complement is the value of beginning inventory plus the cost of purchases divided by the retail selling prices of beginning inventory and purchases. On Aug. 15, 2014, the IRS and the Treasury Department published final regulations under Section 1.471-8 in TD 9688 clarifying a taxpayer’s treatment of certain sales-based vendor allowances, margin protection payments, permanent markups and markdowns, and temporary markups and markdowns when determining the cost complement.
The final regulations and the revenue procedure apply for taxable years beginning after Dec. 31, 2014.