Question

1.         According to the IRS, how is the LIFO recapture tax computed? List the steps that must be followed in computing the tax.

2.         According to the IRS, on which form or forms is the LIFO recapture tax reported and paid each year? Describe specifically how and where it is reported on each form.

Please answer each question in complete sentences, and cite the name and number of the IRS publication or form/instruction where you found each answer, and the page number on which the answer is found. Use your own words in the answer – do not copy the IRS’ language

Answer 1

1. STEPS TO COMPUTE LIFO RECAPTURE TAX :

STEP 1: Calculate Inventory value using LIFO method

STEP 2: Calculate Inventory value using FIFO method

STEP 3: LIFO Recapture Amount = Inventory calculated using FIFO - Inventory calculated using LIFO

STEP 4: LIFO Recapture Tax = Step 3 * Rate of Tax

2. According to IRC form 970 is used to calculate LIFO Recapture Tax

LIFO Recapture tax can be calculated and allocate for a period of 4 Years starting in the year in which it is first computed.

75 % of LIFO Recapture tax is deffered in next 3 years.

as per IRC sec 1363(d)(1) 25% of LIFO Recapture Amount is added to Gross income of the Organization.

LIFO Recapture tax has to be reported in Federal Form 1120, Line 31 which comes in Form J , Line 11.