Tax News

CCH (cch.taxgroup.com) reports:

The IRS has announced that it will view a rolling-average method of valuing inventories for financial accounting purposes as clearly reflecting income for federal income tax purposes provided a taxpayer meets one of the two newly created safe harbors. The IRS has also provided procedures by which a taxpayer may obtain automatic consent to change to a rolling-average method.
Safe Harbors
A taxpayer's use of the rolling-average method for financial accounting purposes will be deemed to clearly reflect income provided:
(1) the taxpayer recomputes the rolling average cost of an inventory item according to one of the following:
(a) each time the taxpayer purchases or produces an additional unit or units of that item; or
(b) on a regular basis but no less frequently than once per month; and
(2) the taxpayer satisfies one of the following conditions:
(a) the variance percentage (as determined under sec. 4.02 of the new procedure) does not exceed one percent; or
(b) the taxpayer's entire inventory turns at least four times per year (as determined under sec. 4.03 of the new procedure).
Variance Percentage
The variance percentage is determined by:
(1) subtracting the cost of the ending inventory, computed using the taxpayer's rolling-average method, from the cost of the ending inventory using either the FIFO or the specific identification method to determine the variance; and then
(2) dividing the variance by the aggregate rolling-average cost of the inventory.
  Inventory Turns
The number of times that the taxpayer's entire inventory turns during a tax year is equal to the cost of goods sold divided by average inventory, which is the average of beginning and ending inventory. However, a taxpayer using a LIFO cost-flow assumption for tax purposes must calculate inventory turns using rolling-average cost and a FIFO cost-flow assumption.
A taxpayer's use of a rolling-average method of accounting on a federal income tax return filed before June 25, 2008, in accordance with this procedure will not be raised by the IRS as an audit issue. In addition, for tax returns filed before June 25, 2008, where the taxpayer's use of a rolling-average method is an issue under consideration, the IRS will not pursue it further.
This procedure is effective for tax years ending on or after December 31, 2007.
Rev. Rul. 71-234, 1971-1 CB 148, and Rev. Rul. 77-480, 177-2 CB 186, are modified to permit taxpayers to use a rolling-average method of accounting for inventories as provided under the new procedure. Rev. Proc. 2002-9, 2002-1 CB 327, is modified and amplified to include in the Appendix the automatic change provided in the new procedure.
Rev. Proc. 2008-43, 2008FED ¶46,485
Other References:
Code Sec. 471
CCH Reference - 2008FED ¶22,208.50
Code Sec. 472
CCH Reference - 2008FED ¶22,240.25
CCH Reference - 2008FED ¶22,240.33
Tax Research Consultant
CCH Reference - TRC ACCTNG: 15,154.20
CCH Reference - TRC ACCTNG: 18,110.05