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Washington Tax Alert - January 21, 2009

Washington Tax Alert from Don Barnes,dbarnes@washingtontaxlaw.com
January 21, 2009

In light of the recent decline in petroleum prices and other materials costs (and even labor costs in certain instances), some taxpayers may benefit from using the lower-of-cost-or-market (LCM) method to value their inventories. For tax purposes, the LCM method permits a taxpayer to write down the cost of inventory to the amount the taxpayer would incur to repurchase or reproduce the inventory using year-end prices. This definition of "market" is different from the definition of market for financial accounting purposes, where market for purposes of LCM is defined as net realizable value.

If the LCM method is beneficial for tax purposes because materials or labor costs are lower at year end than they were earlier in the year, taxpayers may be able to change from a FIFO or average cost method to LCM using the automatic consent procedures of Rev. Proc. 2008-52 for accounting method changes.

The LCM method is not available for taxpayers that determine the cost of their ending inventory using the LIFO method.