The American Institute of CPAs has written a letter to the Internal Revenue Service requesting more flexibility for businesses that needed to get rid of extra inventory during the COVID-19 pandemic.
In the letter, sent Tuesday by AICPA Tax Executive Committee chair Jan Lewis to IRS associate chief counsel John Moriarty, the institute included some examples of both the section 473 safe harbor method and the need for expedited relief to elect that method for inventory liquidation. The AICPA sent a separate
The AICPA has been urging the IRS since the outbreak of the pandemic to ease the tax requirements and deadlines for taxpayers and tax professionals as they cope with the economic fallout. While the overall economy has rebounded strongly since last year, the spread of the Delta variant across the country has added fresh uncertainty to many businesses who may have needed to liquidate their inventory last year. The last in, first out method of accounting for inventory may require extra flexibility.
“The AICPA recommends a section 473 safe harbor method providing that, if a taxpayer has experienced a qualified liquidation for a liquidation year, the taxpayer would disregard the liquidation for the liquidation year and would retain the LIFO layers related to the opening inventory of the liquidation year,” Lewis wrote. “Under our recommended safe harbor method, the taxpayer does not recognize income attributable to the liquidation of these LIFO layers if the taxpayer completely replaces the inventory by the end of the replacement period. This safe harbor method alleviates the burden of paying additional taxes on the related income and, in general, eliminates the need to file amended tax returns to obtain section 473 relief.”
Permitting a section 473 safe harbor method and expedited relief would help U.S. businesses, especially small businesses, deal with unanticipated tax increases and administrative burdens caused by trade disruptions related to COVID-19, the AICPA pointed out in its letter.
The AICPA also encouraged the IRS to expedite publication of guidance providing the section 473 safe harbor method the institute proposed so affected taxpayers who haven’t already filed their federal income tax return for the liquidation year can include the section 473 safe harbor election statement with a timely filed (including any extension) original federal income tax return.
“Expedited relief allows taxpayers to avoid the burden of paying additional taxes related to the income resulting from the qualified liquidation for the liquidation year,” Lewis wrote. “Transparency and visibility of the tax laws is a guiding principle for sound tax administration.”
