Assume Company A sold 275 units in 2021. It would recognize $41,250 of gross receipts reduced by $27,500 of costs of goods sold resulting in $13,750 of gross profit.
While you might view the examples that were provided as immaterial, industries that commonly use LIFO - including pharmaceutical distributors, specialty retailers, industrial equipment, farm equipment, furniture businesses, and the automotive industry- are seeing significant increases in their tax bills.
When choosing what permissible method could be used going forward when electing out of LIFO, taxpayers should confirm they are not eligible for small business inventory exceptions. Small businesses are generally defined as corporations or partnerships that have an average of less than $26,000,000 or $27,000,000 gross receipts when evaluating the 3 previous taxable years.
The mechanics are seen in the following example. Assume OPEC refused to sell petroleum products to U.S. companies and a U.S. petroleum company was forced to liquidate $8,000,000 of its LIFO reserve of petroleum in the 2005 taxable year. The Treasury department publishes a notice stating the event was a qualified inventory interruption. In 2006, the company replaced the petroleum at a cost of $10,500,000.