The Internal Revenue Service (hereinafter “IRS”) has issued new administrative authority for changing a method of accounting for retail inventory. Newly issued Rev. Proc. 2014-48 provides the select procedures under which a taxpayer may obtain the IRS’s consent to change a method of accounting to comply with the final treasury regulations on the retail inventory method of accounting. The final treasury 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 (hereinafter “LCM”) method of accounting to account for margin protection payments.
As set forth under Treas. Reg. § 1.471-8, a taxpayer may use the retail inventory method to compute the value of ending inventory at approximate cost (i.e., retail cost) or approximate 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 treasury regulations under Treas. Reg. § 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 treasury regulations and the revenue procedure apply for taxable years beginning on January 1, 2015.