Avoiding a Tax Bite

2004 profits could cause recyclers to look at LIFO accounting rules.

During the 1998 to 2002 stretch, scrap dealers may have forgotten how to think in terms of protecting profits from tax collecting agencies. But 2004 will almost certainly be a year when such thinking will be necessary. And the good news: A clarification of IRS rules seems to have provided a new tax savings technique to scrap dealers.

 

According to Stanton Williams, president of LIFO Systems LP, Fort Worth, Texas, companies that have a minimum scrap metal inventory worth $500,000 or more at year’s end may use the substantial 2004 price inflation in metals values to “significantly reduce” their federal income taxes.

 

The LIFO (last-in-first-out) inventory method is a once-a-year computation that allows companies to defer income based upon inventory inflation, Williams says. He adds that companies using this method do not have to actually manage their inventory on a last-in-first-out basis.

 

Williams says in January of 2002 the IRS issued updated regulations the IPIC (Inventory Price Index Computation) LIFO method that uses government published (Bureau of Labor Statistics) Producer Price Indexes to measure commodity inflation

 

As an example, if a company has a scrap metal inventory of $3.5 million at 2004 year end, the first-year LIFO reserve would potentially be $1.75 million (based on the August 2004 PPI index for iron and steel scrap),” says Williams “At a 40 percent tax rate, this would reduce [a company’s] 2004 federal tax obligation by approximately $700,000.” He notes that this is an example, “and there are many variables that would impact the actual benefit.”

 

Williams says that LIFO should be explored by scrap companies as a long-term strategy, as it is used by steel and petroleum companies. “And in highly inflationary periods, like scrap metal has been experiencing since 2002, the immediate tax benefits can be substantial.”

 

Says Williams, “If you carry a scrap metal inventory, you should at least explore the potential tax benefits using the LIFO inventory method. Virtually every type of scrap metal is experiencing price inflation in 2004.”

Those interested in contacting Williams or in finding out more about LIFO Systems can visit the company’s Web site at www.lifosystems.com or e-mail to Stanton.Williams@lifosystems.com.