SECTION 21. INVENTORIES — Internal Revenue Bulletin 2015-5

.01 Cash discounts . (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for cash discounts (that is, discounts granted for timely payment) when they approximate a fair interest rate, from a method of consistently including the price of the goods before discount in the cost of the goods and including in gross income any discounts taken (the “gross invoice method”), to a method of reducing the cost of the goods by the cash discounts and deducting as an expense any discounts not taken (the “net invoice method”), or vice versa . See Rev. Rul. 73–65, 1973–1 C.B. 216. (2) Computation of § 481(a) adjust- ment for changes to net invoice method . In the case of a taxpayer changing from the gross invoice method to the net invoice method, a negative § 481(a) adjustment is required to prevent duplications arising from the fact that the gross invoice method reported income upon timely payment for some or all of the goods that remain in inventory, and a positive § 481(a) adjustment is required to prevent omissions arising from the fact that the gross invoice method included the invoice price, unadjusted for the cash discounts, of some or all goods in cost of goods sold and the discount will be earned by payment in a subsequent taxable year. The net

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§ 481(a) adjustment is computed by deducting the “Applicable Discount” at the beginning of the year of change from the “Available Discount” at the beginning of the year of change. The Available Discount is equal to the difference between the accounts payable balance under the gross invoice method and the net invoice method. The Applicable Discount is equal to the difference between the beginning inventory value under the gross invoice method and the net invoice method.

Example . Taxpayer’s accounts payable balance at the beginning of the year of change was $1,000 under the gross invoice method and $980 under the net invoice method. Taxpayer’s inventory value was $3,000 under the gross invoice method and $2,955 under the net invoice method. The Available Discount is $20 ($1,000 - $980) and the Applicable Discount is $45 ($3,000 - $2,955). Thus, Taxpayer’s net § 481(a) adjustment is a negative $25 ($20 $45).

(3) Computation of § 481(a) adjust- ment for changes to gross invoice method . In the case of a taxpayer changing from the net invoice method to the gross invoice method, a positive § 481(a) adjustment is required to prevent omissions arising from the fact that the net invoice method did not report income upon timely payment for some or all of the goods that remain in inventory, and a negative § 481(a) adjustment is required to prevent duplications arising from the fact that the net invoice method included the invoice price, adjusted for the cash discounts, of some or all goods in cost of goods sold and the discount will be earned by payment in a subsequent taxable year. The net § 481(a) adjustment can be computed by deducting the “Available Discount” at the beginning of the year of change from the “Applicable Discount” at the beginning of the year of change. The Available Discount is equal to the difference between the accounts payable balance under the gross invoice method and the net invoice method. The Applicable Discount is equal to the difference between the beginning inventory value under the gross invoice method and the net invoice method.

Example . Taxpayer’s accounts payable balance at the beginning of the year of change was $980 under the net invoice method and $1,000 under the gross invoice method. Taxpayer’s inventory value was $2,955 under the net invoice method and $3,000 under the gross invoice method. The Applicable Discount is $45 ($3,000 - $2,955) and the Available Discount is $20 ($1,000 - $980). Thus, Taxpayer’s net § 481(a) adjustment is a positive $25 ($45 - $20).

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.01 is “48.” (5) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.02 Estimating inventory “shrinkage” . (1) Description of change . This change applies to a taxpayer that wants to change to a method of accounting for estimating inventory shrinkage in computing ending inventory, using:

(a) the “retail safe harbor method” described in section 4 of Rev. Proc. 98–29, 1998–1 C.B. 857, as modified by this revenue procedure; or

(b) a method other than the retail safe harbor method, provided (i) the taxpayer’s present method of accounting does not estimate inventory shrinkage, and (ii) the taxpayer’s proposed method of accounting (that estimates inventory shrinkage) clearly reflects income under § 446(b).

(2) Additional requirements . If the taxpayer wants to change to a method of accounting for inventory shrinkage other than the retail safe harbor method, the taxpayer must attach to its Form 3115 a statement setting forth a detailed description of all aspects of the proposed method of estimating inventory shrinkage (including, for last-in, first-out (LIFO) taxpayers, the method of determining inventory shrinkage for, or allocating inventory shrinkage to, each LIFO pool). The director or national office subsequently may review whether the proposed method clearly reflects the taxpayer’s income under § 446(b), notwithstanding any provision of Rev. Proc. 2015–13, 2015–5 I.R.B. 419 (or successor). If the director or the national office determines that the proposed method of accounting does not clearly reflect the taxpayer’s income, the taxpayer will be treated as having made a change in method of accounting without obtaining the consent of the Commissioner as required by § 446(e). See sections 2.01(3) and 2.03 of Rev. Proc. 2015–13. (3) Designated automatic accounting method change number . The designated automatic accounting method change

number for a change under this section 21.02 is “49.” (4) Contact information . For further information regarding a change under this section, contact Steven Gee at (202) 3177007 (not a toll-free number). .03 Small taxpayer exception from re- quirement to account for inventories un- der § 471 .

(1) Description of change . This change applies to either a taxpayer (other than a taxpayer described § 448(a)(3)) with “average annual gross receipts” (as defined in section 5.01 of Rev. Proc. 2001–10, as modified by Announcement 2004–16 (regarding placement of § 481(a) adjustment on the Form 3115), and Rev. Proc. 2011–14 (removing § 6.02(1)(a) of Rev. Proc. 2001–10)) of $1,000,000 or less or a qualifying taxpayer (other than a taxpayer described in § 448) with “average annual gross receipts” (as defined in section 5.02 of Rev. Proc. 2002–28, as modified by Announcement 2004–16 (regarding placement of § 481(a) adjustment on the Form 3115), and Rev. Proc. 2011–14 (removing § 7.02(1)(a) of Rev. Proc. 2002– 28)) of $10,000,000 or less that wants to change from a method of accounting for inventoriable items (including, if applicable, from the method of capitalizing costs under § 263A) to the method described in Rev. Proc. 2001–10 and Rev. Proc. 2002– 28, for treating inventoriable items in the same manner as materials and supplies that are not incidental under § 1.162–3.

(2) Manner of making change . See Rev. Proc. 2001–10 or Rev. Proc. 2002–28 (as applicable) for additional guidance on the computation of the § 481(a) adjustment and the completion of the Form 3115.

(3) Concurrent automatic change to the overall cash method under Rev. Proc. 2001–10 or Rev. Proc. 2002–28 . A taxpayer making both this change and a change to the overall cash method under Rev. Proc. 2001–10 or Rev. Proc. 2002–28 ( see section 14.03 of this revenue procedure) for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115. See section 6.03(1)(b) of Rev. Proc.

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2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.03 for the small taxpayer ($1,000,000) inventory exception contained in Rev. Proc. 2001–10 is “50.” The designated automatic accounting method change number for a change under this section 21.03 for the small taxpayer ($10,000,000) inventory exception contained in Rev. Proc. 2002–28 is “51.”

(5) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number). .04 Qualifying volume-related trade discounts .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting to treat qualifying volume-related trade discounts as a reduction in the cost of merchandise purchased at the time the discount is recognized in accordance with § 1.471–3(b). A “qualifying volume-related trade discount” means a discount satisfying the following criteria:

(a) the taxpayer receives or earns the discount based solely upon the purchase of a particular volume of the merchandise to which the discount relates;

(b) the taxpayer is neither obligated nor expected to perform or provide any services in exchange for the discount; and

(2) Section 481(a) adjustment . The net § 481(a) adjustment attributable to the change is computed in a manner similar to the computation of a net § 481(a) adjustment in the case of a change to the net invoice method of accounting for cash discounts. See section 21.01(2) of this revenue procedure.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.04 is “53.” (4) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.05 Impermissible methods of identifi- cation and valuation .

(1) Description of change . This change applies to a taxpayer:

(a) changing from an impermissible method of accounting described in §§ 1.471–2(f)(1) through (5), including a LIFO taxpayer restoring a write down of inventory below cost or discontinuing maintaining an inventory reserve;

(b) changing from a method that is not in accordance with § 1.471–2(c) for determining the value of “subnormal” goods; or

(c) changing from a gross profit method or from a method of determining market that is not in accordance with § 1.471–4; or

(i) Gross profit method . A gross profit method is a method in which the taxpayer estimates the cost of goods sold by reducing its gross sales by a percentage “markup” from cost. The estimated cost of goods sold is subtracted from the sum of the beginning inventory and purchases and the result is used as the ending inventory.

(ii) Method of determining market . An example of a method of determining market that is not in accordance with § 1.471–4 is where a taxpayer, under ordinary circumstances, determines the market value of purchased merchandise using judgment factors, and not using the prevailing current bid price on the inventory date for the particular merchandise in the volume in which it is usually purchased by the taxpayer.

(2) Applicability . For purposes of this change, a taxpayer must be changing to an inventory method (identification or valuation, or both) specifically permitted by the Code, the regulations, or other guidance published in the Internal Revenue Bulletin, or a decision of the United States Supreme Court for the inventory goods, and the taxpayer is neither prohibited from using that method nor required to use a different inventory method for those inventory goods. This change does not apply to a change described in another section of this revenue procedure or in other guidance published in the Internal Revenue Bulletin.

(3) Designated automatic accounting method change number . The designated automatic accounting method change

number for a change under this section 21.05 is “54.” (4) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.06 Core Alternative Valuation Method . (1) Description of change . (a) Applicability . This change applies to a remanufacturer and rebuilder of motor vehicle parts and a reseller of remanufactured and rebuilt motor vehicle parts that use the cost or market, whichever is lower, (LCM) inventory valuation method to value their inventory of cores held for remanufacturing or sale and wants to use the Core Alternative Valuation (CAV) method specified in Rev. Proc. 2003–20, 2003–1 C.B. 445. (b) Inapplicability . This change does not apply to a taxpayer that values its inventory of cores at cost (including a taxpayer using the LIFO inventory method) unless the taxpayer concurrently changes (under section 6.02 of Rev. Proc. 2003–20) from cost to the LCM method for its cores (including labor and overhead related to the cores in raw materials, work-in-process, and finished goods).

(2) Concurrent automatic change . A taxpayer making both this change and (i) a change from the cost method to the LCM method under section 21.11 of this revenue procedure, or (ii) a change from the LIFO inventory method to a permitted method for identification under (and as determined and defined in) section 22.01(1)(b) of this revenue procedure for the same year of change, should file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.06 is “55.” (4) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number).

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.07 Replacement cost for automobile dealers’ parts inventory .

(1) Description of change . This change applies to a taxpayer that is engaged in the trade or business of selling vehicle parts at retail, that is authorized under an agreement with one or more vehicle manufacturers or distributors to sell new automobiles or new light, medium, or heavy-duty trucks, and that wants to use the replacement cost method described in section 4 of Rev. Proc. 2002–17, 2002–1 C.B. 676, as modified by Rev. Proc. 2006–14, 2006–1 C.B. 350, for its vehicle parts inventory. See Rev. Proc. 2002–17 for further information regarding this change.

(2) Manner of making change . This change is made on a cut-off basis and applies only to the computation of ending inventories on or after the beginning of the year of change. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.07 is “63.” (4) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number). .08 Replacement cost for heavy equip- ment dealers’ parts inventory .

(1) Description of change . This change applies to a heavy equipment dealer that is engaged in the trade or business of selling heavy equipment parts at retail, that is authorized under an agreement with one or more heavy equipment manufacturers or distributors to sell new heavy equipment, and that wants to use the replacement cost method described in section 4 of Rev. Proc. 2006–14, 2006–1 C.B. 350, for its heavy equipment parts inventory.

(2) Manner of making the change . This change is made on a cut-off basis and applies only to the computation of ending inventories after the beginning of the year of change. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(3) Concurrent automatic change . A taxpayer making both this change and another automatic change in method of accounting under § 263A ( see section 11 of this revenue procedure) for the same year of change may file a single Form 3115 for

both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2).

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.08 is “96.” (5) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number). .09 Rotable spare parts . (1) Description of change . This change applies to a taxpayer that is using the safe harbor method of accounting to treat its rotable spare parts as depreciable assets in accordance with Rev. Proc. 2007–48, 2007–2 C.B. 110, as modified by this revenue procedure, and wants to change its method of accounting to treat its rotable spare parts as inventoriable items. This change also applies to a taxpayer who is treating its rotable spare parts as depreciable assets in a manner similar to the safe harbor method described in Rev. Proc. 2007–48, and wants to change its method of accounting to treat its rotable spare parts as inventoriable items. A taxpayer changing its method of accounting for rotable spare parts under this section 21.09, must use a proper inventory method to identify and value its rotable spare parts.

(2) Eligibility rule inapplicable . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to a taxpayer that is required to make the change in method of accounting pursuant to section 5.06 of Rev. Proc. 2007–48.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.09 is “110.” (4) Contact information . For further information regarding a change under this section, contact Elizabeth Binder at (202) 317-7003 (not a toll-free number). .10 Advance Trade Discount Method . (1) Description of change . This change applies to a taxpayer that wants to use the Advance Trade Discount Method de

scribed in Rev. Proc. 2007–53, 2007–2 C.B. 233.

(2) Applicability . This change in method of accounting applies to a taxpayer using an overall accrual method of accounting that is required to use an inventory method of accounting, that maintains inventories as provided in § 471 and the regulations thereunder, and that receives advance trade discounts as defined in section 4.03 of Rev. Proc. 2007–53.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.10 is “111.” (4) Contact information . For further information regarding a change under this section, contact Neville R. Jiang, at (202) 317-7007 (not a toll-free number). .11 Permissible methods of identifica- tion and valuation .

(1) Description of change . (a) Applicability . This change applies to a taxpayer that wants to change from one permissible method of identifying and valuing inventories to another permissible method of identifying and valuing inventories. For example, a taxpayer using firstin, first-out (FIFO) as its inventoryidentification method may change its inventory-valuation method from cost to cost or market, whichever is lower (LCM). (Note, however, a real estate developer may not value real property or improvements to the real property at LCM because real property is not inventoriable property under § 1.471–1. Also, a taxpayer who meets the definition of a “dealer in securities” under both § 1.471–5 and § 475 is required to account for securities, as defined in § 475, under § 475 and may not use the rules described in § 1.471–5 for those securities.) Furthermore, a taxpayer may change to a permissible method of valuing “subnormal” goods under § 1.471–2(c).

However, this change does not apply to any change described in another section of this revenue procedure or in other guidance published in the Internal Revenue Bulletin, or to any changes within the last-in, first-out (LIFO) inventory method. For example, this change does not apply to a taxpayer that wants to change to a rolling-average method ( but see section 21.14 of this revenue procedure).

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(b) Permissible method defined . For purposes of this change, a permissible method is an inventory method (identification or valuation, or both) specifically permitted for inventories by the Code, the regulations, or other guidance published in the Internal Revenue Bulletin, or a decision of the United States Supreme Court. However, an otherwise permissible inventory method is not permissible under this section 21.11 for a specific taxpayer if that taxpayer is prohibited from using that method or if that taxpayer is required to use a different method.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.11 is “137.” (3) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.12 Change in the official used vehicle guide utilized in valuing used vehicles .

(1) Description of change . Used vehicles taken in trade as part payment on the sale of vehicles by a dealer may be valued for inventory purposes at valuations comparable to those listed in an official used vehicle guide as the average wholesale prices for comparable vehicles. See Rev. Rul. 67–107, 1967–1 C.B. 115. This change applies to:

(a) a taxpayer that wants to change from not using an official used vehicle guide to using an official used vehicle guide for valuing used vehicles; or

(b) a taxpayer that wants to change to a different official used vehicle guide for valuing used vehicles.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.12 is “138.” (3) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.13 Invoiced advertising association costs for new vehicle retail dealerships .

(1) Description of change . This change applies to a taxpayer that is engaged in the trade or business of retail sales of new automobiles or new light-duty trucks (“dealership”) that wants to discontinue

capitalizing certain advertising costs as acquisition costs under § 1.471–3(b). The change applies to advertising costs that meet the following criteria: (a) the dealership must pay this advertising fee when acquiring vehicles from the manufacturer; (b) the advertising costs are separately coded and included in the manufacturer’s invoice cost of the new vehicle; (c) the advertising cost is a flat fee per vehicle or a fixed percentage of the invoice price; and (d) the fees collected by the manufacturer are paid to local advertising associations that promote and advertise the manufacturer’s products in the dealership’s market area. Under the proposed method, the dealership will exclude advertising costs that meet the above criteria from the cost of new vehicles and deduct the advertising costs under § 162 as the advertising services are provided to the dealership. See § 1.461–4(d)(2)(i).

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 21.13 is “139.” (3) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.14 Rolling-average method of ac- counting for inventories .

(1) Description of change . This change applies to a taxpayer that uses a rollingaverage method to value inventories for financial accounting purposes and wants to use the same rolling-average method to value inventories for federal income tax purposes in accordance with Rev. Proc. 2008–43, 2008–30 C.B. 186, as modified by Rev. Proc. 2008–52, 2008–2 C.B. 587 ( see section 13).

(2) Manner of making change . This change is made on a cut-off basis and is applied only to the computation of ending inventories after the beginning of the year of change. However, if the taxpayer’s books and records contain sufficient information to compute a § 481(a) adjustment, the taxpayer may choose to implement the change with a § 481(a) adjustment as provided in sections 7.02 and 7.03 of Rev. Proc. 2015–13, 2015–5 I.R.B. 419.

(3) Designated automatic accounting method change number . The designated automatic accounting method change

number for a change under this section 21.14 is “114.” (4) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

. 15 Sales-Based Vendor Chargebacks . (1) Description of change. This change, as described in Rev. Proc. 2014– 33, 2014–22 I.R.B. 1060, applies to a taxpayer that wants to change its method of accounting to treat sales-based vendor chargebacks as a reduction in cost of goods sold in accordance with § 1.471– 3(e)(1). (2) Certain eligibility rule temporarily inapplicable. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to this change for a taxpayer’s first and second taxable years ending on or after January 13, 2014. (3) Concurrent automatic changes . A taxpayer making both this change and the change described in section 11.12 of this revenue procedure for the same taxable year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic change numbers for both changes on the appropriate line on the Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for changes in methods of accounting under this section 21.15 is “203.”

(5) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free number).

.16 Retail inventory method. (1) Description of change. This change, as described in Rev. Proc. 2014– 48, 2014–36 I.R.B. 527, applies to a taxpayer using the retail inventory method that wants to make one of the following changes:

(a) From adjusting to not adjusting the numerator of the cost complement by the amount of an allowance, discount, or price

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rebate that is required under § 1.471–3(e) to reduce only cost of goods sold;

(b) From adjusting to not adjusting the denominator of the cost complement for temporary markups and markdowns;

(c) In the case of a retail LCM taxpayer, to computing the cost complement using a method described in § 1.471– 8(b)(3), including changes from a method described in § 1.471–8(b)(3) to another method described in § 1.471–8(b)(3);

(d) In the case of a retail cost taxpayer, from not adjusting to adjusting the denominator of the cost complement for permanent markups and markdowns.

(2) Effective date and certain eligibility rule temporarily inapplicable . This section 21.16 is effective for taxable years beginning after December 31, 2014. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply for a taxpayer’s first or second taxable years beginning after December 31, 2014.

(3) Multiple changes . A taxpayer making multiple changes under this section 21.16 for the same year of change should file a single Form 3115.

(4) Manner of making change . A taxpayer making a change under this section 21.16 for its first or second taxable year beginning after December 31, 2014 may use either a § 481(a) adjustment as provided in sections 7.02 and 7.03 of Rev. Proc. 2015–13 or implement the change on a cut-off basis. If the taxpayer uses a cut-off basis, the change applies only to the computation of ending inventories after the beginning of the year of change, and a § 481(a) adjustment is neither permitted nor required if a change is made on a cut-off basis.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for changes in methods of accounting under this section 21.16 is “204.”

(6) Contact information . For further information regarding a change under this section, contact Natasha M. Mulleneaux at (202) 317-7007 (not a toll-free number).