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EFFECT OF COVID-19 ON LIFO INVENTORY AND SECTION 473 RELIEF

EFFECT OF COVID-19 ON LIFO INVENTORY AND SECTION 473 RELIEF

In 2020 and 2021, government restrictions that were implemented to prevent the spread of COVID-19 caused significant interruptions to the flow of goods internationally. For companies using the last in, first out (LIFO) inventory valuation method, these preventative measures made the replenishment of inventory difficult or impossible, which resulted in depleted inventory layers, increased taxable income, and increased tax liabilities for taxable years ending March 31, 2020, through at least taxable years ending June 30, 2021. The AICPA has recommended to the IRS that these restrictions impacting foreign trade be treated as a “qualified inventory interruption” which under section 473 is defined as having occurred when, “the Secretary, after consultation with the appropriate Federal officers, determines that (i) any embargo, international boycott, or other major foreign trade interruption has made it difficult or impossible to replace any class of goods for any class of taxpayers during the liquidation year, and (ii) the application of this section to that class of goods and taxpayers is necessary to carry out the purpose of this section.” Application of section 473 would allow qualified companies to disregard the qualified liquidation of inventory in the liquidation year if they replenish their inventory by the end of the three-year replacement period. This would relieve the taxpayer from paying additional tax on higher taxable income that resulted from inventory with lower cost being included in cost of goods sold. The AICPA has requested that the IRS provide additional guidance on the application of section 473.

 

09/15/2021

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